Economics Mathematics & Economics Math Problem Paper

Question 1 (33%)

Assume you are in October 2012 and you are living in New York. Before the hurricane Sandy took place, assume the market for gasoline at petrol stations is in equilibrium and works normally.

a)     Focus on the supply curve and explain what are the conditions that impact on the behaviour of supply curves in general. Draw a simple price, quantity (P,Q) diagram and explain what happened to the supply of gas in NY after hurricane Sandy took place. Explain how market price and quantity can change due to shifts in supply.

b)    Focus now on the demand curve and explain what are the conditions that can impact the behaviour of demand curves in general. Draw a simple price, quantity (P,Q) diagram and explain what happened to car users wishing to refuel their cars with gasoline in NY after hurricane Sandy took place. Explain how market price and quantity can change due to shifts in demand.

c)     Based on what happened with hurricane Sandy regarding the shortage of gas and the speculation on gas prices in NY city, what kind of advice would you give to car owners/users in New York? Use economic arguments and justify your answer.

Question 2 (33%)

Price controls and quantity restrictions (quotas) are common mechanisms used by authorities in emergency situations. The aftermath of hurricane Sandy is a good example of that. These mechanisms create winners and losers: some people benefit from the policy, but others are made worse off. Sometimes the people intended to be protected end up even worse.

a)     In a simplified manner, assume Figure 1, below, shows the new equilibrium for gasoline at petrol stations in NY after hurricane Sandy took place. Explain the concepts of consumer surplus and producer surplus and calculate the net gain to gas suppliers and consumers in Figure 1. Who were the winners and the losers with the new development?

b)    To defend consumers against speculative gas prices, assume a price ceiling of $5 US per gallon was imposed by the authorities. To avoid long queues and shortages of gas, authorities also decided to introduce a maximum quantity buying restriction of 5 US gallons per car, to avoid hoarding. Explain what price ceiling and quotas are and their main purpose. Based on the new measures from the authorities redraw the updated price quantity diagram and recalculate the new consumer surplus and producer surplus (use approximate numbers). Identify who are now the winners and losers and who became better off and worst off? Justify your comments.

c)     Comment on the rationale and effectiveness of price mechanisms and quotas imposed by governments and the role of non-market mechanisms. Provide examples. What kind of advice would you give to the Mayor of NY city regarding the prevention of future gas shortages?

Question 3 (34%)

a)     With the help of a simple price-quantity diagram, explain the concept of price elasticity of demand and highlight the various possible scenarios. Assume the price elasticity of demand (PED) for new cars in NY city is -0.5. What case is this? Is this good or bad for local car buyers and what strategies can they adopt for buying cars?

b)    Buying electric cars is a recent trend in the habits of New Yorkers. Apparently, each time the gasoline price increases the shift towards the tendency for buying electric cars instead of gas cars, also rises. Explain the concept of cross elasticity of demand (CED) and apply this to explain the tendency for buying gas or electric cars when there are substantial changes in the price of gasoline. Can we consider electric cars as being substitutes of gas cars in economic terms? Justify your comments.

c)     The very high prices of properties in the NY city centre has driven local residents away to other places where they can find suitable accommodation at reasonable prices. Typical New Yorkers live far away from the city centre, spending a considerable amount of time commuting every day from home to work and vice-versa. What implications do have a declining number of NY residents living in the city centre? What advice would you give to the Mayor of NY city in order to stop/reverse such decline?