. For each event, illustrate the impact on the relevant market and determine what will happen to the equilibrium price and quantity in that market. (40 points – 10 points per line item)
Event
Market for:
Show which curve shifts
Equilibrium price rise or fall?
Equilibrium quantity increase or decrease?
Economic growth is expected to improve in the next two quarters.
Aluminum
Plastics production capacity has increased.
Plastics
The Japanese government has decided to subsidize its domestic automobile producers with stimulus money.
Automobiles
Manufacturers who use plastic as an input have access to cheaper plastic.
Manufactured goods that use plastic as an input
2. Use the information below of Labor to Total Product (TP) to answer questions A, B, and C. (60 points)
Labor
Total product
(pairs of shoes)
0
0
1
20
2
50
3
75
4
80
5
75
A. Given the information above, what is the marginal product of the third unit of labor?
B. Given the information above, at what point do diminishing marginal returns set in?
C. Given the information above, at what point do negative marginal returns set in?
To determine the impact on the relevant market and the changes in equilibrium price and quantity, we need to analyze each event separately.
1. Economic growth is expected to improve in the next two quarters.
- Market for: Aluminum
- The curve that will shift: The demand curve for aluminum will shift to the right.
- Equilibrium price rise or fall: The equilibrium price of aluminum will rise.
- Equilibrium quantity increase or decrease: The equilibrium quantity of aluminum will increase.
2. Plastics production capacity has increased.
- Market for: Plastics
- The curve that will shift: The supply curve for plastics will shift to the right.
- Equilibrium price rise or fall: The equilibrium price of plastics will fall.
- Equilibrium quantity increase or decrease: The equilibrium quantity of plastics will increase.
3. The Japanese government has decided to subsidize its domestic automobile producers with stimulus money.
- Market for: Automobiles
- The curve that will shift: The demand curve for automobiles will shift to the right.
- Equilibrium price rise or fall: The equilibrium price of automobiles will rise.
- Equilibrium quantity increase or decrease: The equilibrium quantity of automobiles will increase.
4. Manufacturers who use plastic as an input have access to cheaper plastic.
- Market for: Manufactured goods that use plastic as an input
- The curve that will shift: The supply curve for manufactured goods that use plastic will shift to the right.
- Equilibrium price rise or fall: The equilibrium price of manufactured goods that use plastic as an input will fall.
- Equilibrium quantity increase or decrease: The equilibrium quantity of manufactured goods that use plastic will increase.
Moving on to the second question:
Labor | Total Product (pairs of shoes)
---------------------------------------
0 | 0
1 | 20
2 | 50
3 | 75
4 | 80
5 | 75
A. The marginal product of the third unit of labor can be calculated by taking the difference between the total product of the third unit of labor and the total product of the second unit of labor. In this case, the marginal product of the third unit of labor is 50 - 20 = 30 pairs of shoes.
B. Diminishing marginal returns set in when the marginal product of labor starts to decrease. Looking at the table, we can see that after the third unit of labor, the marginal product starts to decrease. Therefore, diminishing marginal returns set in after the third unit of labor.
C. Negative marginal returns set in when the marginal product of labor becomes negative. From the table, we can see that there are no negative values for the total product, so negative marginal returns do not occur in this scenario.