Case / Fair Chapter 4: 1-6

CHAPTER 4

1. (a)

      (b)

      (c)

      

2.   Disagree. Every demand curve hits the quantity axis because of diminishing marginal utility—at a price of zero, there is a limit to how much one can or wants to consume. The argument that at some price, demand goes to zero explains why all demand curves hit the price axis.

3.

The diagram shows that some people are willing to pay a very high price (even higher than P*) for the tickets. Some nonprice rationing system was used to allocate the tickets to people willing to pay as little as Px. What a scalper does is pay those near Px more than they paid for the tickets and then sells the tickets to someone nearer or even above P*. Since both the buyers and sellers engage in the trade voluntarily, both are better off and the exchange is efficient.

4.   The subsidy does increase the “cost” of planting—there is now an opportunity cost. (By planting, the farmers must give up the subsidy.) The subsidy will clearly lead to fewer acres of production and higher farm prices. In effect, it shifts the supply curve to the left.

5.   Disagree; this is not hard to explain. The law of demand does say that higher prices should lead to lower demand, but that refers to a change in the quantity demanded, a movement along a demand curve. An increase in demand (a rightward shift of the demand curve) would result in a higher price. Therefore, a sharp increase in the demand for apartments in New York City is entirely consistent with a sharp increase in rent, which is the price of those apartments.

6.