Can you please solve these questions based on the reading I have attached. Thanks so much! :)

208 MARKETS. SUPPLY AND DEMAND 10.0 CHAPTER 10 LEARNING GOALS After reading this chapter you should be able to: I Use the supply and demand model to analyze the impact of change, in wages or advertising. I Use the supply and demand model to analyze the impact at prim floors. price ceilings. excise taxes, and subsidies on consumers. pro. ducers. and the government. I Explain the concepts of consumer surplus, producer surplus, and deadweight loss and how these concepts can be used toe'raluatg the impact of government policies. ta Compute the price elasticity of demand or supply and apply theccn. cept of price elasticity to analyze supply and demand problems. ta Utilize income elasticity of demand and cross-price elasticity of demand to analyze how the demand for a particular product is affected by changes in incomes and changes in the prices of substi- tute and complementary goods. 10.1 DOUBLE SHIFTS: THE IMPACT OF . _ CHANGES IN WAGES AND ADVERTISING "_'_ ' ~7::Tm....-_. Figure 10.] lays out the key elements of the supply and demand model that were explained in the previous chapter. In almost all cases. a change in a determinant of demand or supply will cause a single shift in either the demand or the supply curve. For example. the following changes in the determinants of demand would cause an increase in the demand curve For a normal good and a movement along the supply curve up and to the right. as we saw in Figure 9.7(b): An increase in Wealth An increase in the price ot'a substitute good An increase in the number ofbuyers More positive expectations about future income and wealth Easier access to credit cards. The Following changes in the detertmnants (ii-supply would cause an rm'rease in the supply curve for a typical good and a movement along: the demand curve down and to the right. as we saw in Figure 914(k): 210 MARKETS, SUPPLY AND DEMAND The cost of energy declines. A new technology that reduces costs is invented. Sellers expect profits to increase in the future. . Profits from selling other goods sold by sellers in this market decline. . The number of sellers in the market increases. In these cases, one curve shifts and then you move along the other curve to a new equilibrium price and quantity. If you can successfully identify which curve shifts in what direction, you should be able to solve any basic supply and demand problem. There are two cases in which both supply and demand curves shift. Notice that in Figure 10.1 wages and advertising appear in the list of factors that shift the demand curve and the list of factors that shift the supply curve. These are the only factors that consistently shift both supply and demand curves. Suppose that the U.S. government increases the federal minimum wage to $15 per hour from its 2021 level of $7.25 per hour. This would be a significant increase in wages for many workers, giving them more money to spend and increasing their demand (shifting demand to the right) for all normal goods and services. However, that increase in wages is also a cost paid by sellers. Their costs have increased, which causes the supply curve to decrease (shift to the left) for those businesses affected by the higher minimum wage. (Businesses that already pay their workers more than $15 per hour would not experience an increase in costs.) Mcdonald's Corporation is one of the nation's largest employers of low-wage labor. Let's consider how raising the minimum wage would affect the market for Mcdonald's Big Mac hamburgers. First, given that most of Mcdonald's employees make less than $15 an hour, Mcdonald's would experience higher costs of produc- tion. Although some of that increase in costs would be offset by the fact that higher paid workers tend to be more productive, their costs would increase somewhat. Therefore, the supply curve decreases, shifting to the left from S, to S, in Figure 10.2. D1 D2 200 Q (millions of Big Macs per year) FIGURE 10.2 The effect of an increase in wages on the U.S. market for Mcdonald's Big Macs.APPLICATIONS OF SUPPLY AND DEMAND 211 But workers at Mcdonald's and other low-wage employers now have a lot more money than they used to, and they use it to buy a lot more goods, including Bic Mac hamburgers (Big Macs are a normal good). The demand for Big Mac hamburgers increases, shifting to the right from D, to D, in Figure 10.2. What is the end result? The double shift caused by a change in wages-the increase in demand and the decrease in supply-results in little or no change in the equilibrium quantity but a small increase in the equilibrium price, as the market moves from point A (where D and S, intersect) to point B (where D, and S, intersect) in Figure 10.2. Advertising also shifts both supply and demand curves, Advertising is very expensive, so implementing an advertising campaign causes an increase in costs, which causes a decrease in the supply curve (a shift to the left). But effective adver- tising increases demand and, if it increases brand name recognition, makes the demand curve steeper because consumers are willing to pay a higher price for each unit of a good. A recent study by Rob Nelissen and Marijn Meijers of Tilburg University in the Netherlands showed that wearing clothes with designer labels leads other people to regard you as wealthier and of higher status, whereas wear- ing the same clothes with no label does not have the same impact.' The logo of the brand is what makes the product more valuable, conveying status and importance. But brand name recognition has to be created over time, often with large expen- ditures of advertising. Consider the case of Apple laptops. By the 2010s Apple laptops dominated the market on college campuses, with over 70% of students purchasing an Apple laptop. But in the 2000s, Apple had only a tiny share of the market, even though they were making superb laptops. Apple changed this with one of history's most successful advertising campaigns, "Mac vs. PC," launched in 2006. The ads first labeled PCs as good for business and boring while displaying Apple Macs as better for photos, music, videos, and fun. Then the ads ridiculed the tendency of PCs to freeze and catch viruses whereas Macs were largely immune from such things. After more than 60 different commercials over four years, Apple had successfully persuaded college students that Apple Mac laptops were fast, fun, and hip whereas PCs were slow, boring, and only good for business. In terms of supply and demand, the huge Mac vs. PC ad campaign cost Apple a lot of money. Apple spent $264 million on television advertising in 2008 alone, over $100 million more than Microsoft spent on PC advertising. This large increase in costs shifted the supply curve to the left, a decrease in supply depicted in Figure 10,3 as the shift from S, to S. The decrease in supply was more than matched by the huge increase in demand. The campaign was so successful that sales of Apple Mac laptops quadrupled. College students became more and more convinced that the Apple Mac was the only laptop they should consider purchasing. This brand name recognition meant that students were willing to buy a Mac laptop even if the price increased. This is evidence of a steeper demand curve, which we see in the movement from D, to D, in Figure 10.3. The equilibrium has moved from point A, where D, and S, intersect, to point B where D, and S, intersect.212 MARKETS, SUPPLY AND DEMAND P ($) $1200 $1000 Q(milions of Apple Macs per year) FIGURE 10.3 The effect of an increase in advertising on the U.S. market for Apple Macintosh (Mac) computers. The Apple ad campaign was extremely successful because the increase in demand more than offset the decrease in supply from the costs of the campaign. making Apple a lot more money in the process. An unsuccessful ad campaign would be one in which the ads fail to increase and steepen the demand curve enough to offset the higher costs that decrease the supply curve. If demand increases less than supply decreases from an unsuccessful ad campaign, the equilibrium quantity will actually decline. As the Apple example shows, the steepness of the demand curve is impor- tant in affecting outcomes. The slope of the demand curve is related to a concept called price elasticity, which measures the responsiveness of quantity demanded to changes in price. Demand curves can be flat (elastic), steep (inelastic), or somewhere in between. A flat, or elastic, demand curve means that even a small increase in price will result in a large decrease in the quantity demanded, such as the demand curve in Figure 10.4(a) for Natty Light Beer. Goods that have lots of substitutes and are not necessities tend to have elastic demand curves. There are many, many substitutes for Natty Light, so consumers will buy a lot less of it if Natty Light becomes more expensive than similar products. A steep, or inelastic, demand curve means that even with a large increase in price, most consumers will continue to buy a product, such as the demand curve for gasoline in Figure 10.4(b). Even if the price of gasoline increases a lot from P, to P,, the quantity demanded in Figure 10.4(b) only falls slightly from Q, to Q. Necessities, goods that have few substitutes, or products with strong brand name recognition (like Apple MacBooks) tend to have inelastic demand curves. Most people need to drive a car that uses gasoline in order to get to work or to buy neces- sities, so they are not able to drive much less when gasoline prices increase. In the short term, the demand for gasoline is extremely inelastic. We tend to see elastic (flat) supply curves when it is easy for firms to increase the quantity supplied when the price increases. Pizza firms that can easily increaseAPPLICATIONS OF SUPER AND FAVAIN A more elastic demand curve (b) A more inelastic demand one Demand for Natty Light Beer P Demand for gasoline Q2 Q 1 FIGURE 10.4 Elastic and inelastic demand curves, their production of pizzas by hiring more workers and buying more pizza ingredi- ents have elastic supply curves. However, supply curves tend to be inelastic (steep) when it is difficult to increase the quantity supplied as price increases, It is extremely difficult for suppliers of apartments in a city to increase the number of apartments they offer for rent when the price of renting an apartment increases. Building sizes are fixed, and it can take several years to build another apartment building. We will study price elasticity in more detail later in this chapter. Another major player impacting markets is the government. One of the main ways in which governments intervene in specific markets is by installing price floors to raise prices and support sellers or price ceilings to lower prices and help purchasers. 10.2 PRICE CEILINGS AND PRICE FLOORS 10.2.1 Price ceiling A price ceiling is a legally set maximum price. Suppliers cannot raise their price above the price ceiling. A price ceiling must be set BELOW the equilibrium price to be effective. If a price ceiling were set equal to or above equilibrium price, businesses would just charge the equilibrium market price where supply equals demand. However, if the price ceiling is set below the equi- librium price, the price falls and a shortage ensues. Price ceilings have been used in poor countries to reduce the price of food and in expensive cities to reduce the price of rent.4 /6 37.9% Weekly Assignment #4-Due Monday (9/19) of Week 5 at the beginning of class QS = - Qa = 50 - 2P Part 2. Double shifts. Read Schneider, Section 10.1, "Double Shifts: The impact of changes in wages and advertising." 1. Using a graph, show how the supply and demand curves for US-made Sport Utility Vehicles (US SUVs) will be affected, and show what happens to equilibrium price and quantity. You do not need to explain your answer. The price is the average price of a US- made SUV, and the quantity is the number US-made SUVs sold per year in thousands. Use the graph that is provided as the starting point for each question. a. (5) Wages for all U.S. workers increase due to an economic boom. P 1.a. US SUVs $45,000 500 Q (1000#) (5) U.S. SUV companies institute a very successful "Buy American SUVs" advertising campaign. 500 Weekly Assignment #4-Due Monday (9/19) of Week 5 at the beginning of class Part II. Price floors and price ceilings. Read Schneider, Section 10.2, Price Ceilings and