1. Problem Set
Chapter 3/4/5

2. Problem 0
Ketchup is a complement (as well as a condiment) for hot dogs. If the price of hot dogs rises, what happens to the market for ketchup? For tomatoes? For tomato juice? For orange juice?

3. Problem 1
Using supply-and-demand diagrams, show the effect of the following events on the market for sweatshirts.
a. A hurricane in South Carolina damages the cotton crop.
b. The price of leather jackets falls.
c. All colleges require morning calisthenics in appropriate attire.
d. New knitting machines are invented.

4. Problem 2
A recent study found that the demand and supply schedules for Frisbees are as follows:

5. Problem 2 a. What are the equilibrium price and quantity of Frisbees?
b. Frisbee manufacturers persuade the government that Frisbee production improves scientists’ understanding of aerodynamics and thus is important for national security. A concerned Congress votes to impose a price floor $2 above the equilibrium price. What is the new market price? How many Frisbees are sold?
c. Irate college students march on Washington and demand a reduction in the price of Frisbees. An even more concerned Congress votes to repeal the price floor and impose a price ceiling $1 below the former price floor. What is the new market price? How many Frisbees are sold?

6. Problem 3
The government has decided that the free-market price of cheese is too low.
a. Suppose the government imposes a binding price floor in the cheese market. Use a supply-and demand diagram to show the effect of this policy on the price of cheese and the quantity of cheese sold. Is there a shortage or surplus of cheese?
b. Farmers complain that the price floor has reduced their total revenue. Is this possible? Explain.
c. In response to farmers’ complaints, the government agrees to purchase all of the surplus cheese at the price floor. Compared to the basic price floor, who benefits from this new policy? Who loses?

7. Problem 4
Using a correctly labeled supply-and-demand diagram, demonstrate how a negative externality leads to market inefficiency. How might the government help to eliminate this inefficiency?

9. Problem 5 Consider the market for fire extinguishers.
a. Why might fire extinguishers exhibit positive externalities in consumption?
b. Draw a graph of the market for fire extinguishers, labeling the demand curve, the social-value
Problems and Applications curve, the supply curve, and the social-cost curve.
c. Indicate the market equilibrium level of output and the efficient level of output. Give an intuitive explanation for why these quantities differ.
d. If the external benefit is $10 per extinguisher, describe a government policy that would result in the efficient outcome.