Saturday, December 22, 2012

Alzheimer's Defense

To keep myself from slipping, I try to complete a problem every day.  While reading Landsberg, I found this seasonal problem"


29. Suppose that wheat is purchased only by poor people, whose demand for wheat is given by the following chart
Price
Quantity
4
5
3
6
2
7
1
8
In the spirit of Christmas, a coalition of rich people has decided to buy wheat at the going market price (whatever that price happens to be) and resell it to poor people at half that price. Moreover, they will buy and resell as much wheat as poor people care to purchase .a) List the coordinates of four points on the new demand curve (that is, the rich people’s demand curve) for wheat. b) suppose that the supply curve for wheat is vertical at a quantity of 7. Do the poor benefit from the generosity of the rich? c) Suppose instead that the supply curve for wheat is horizontal at a price of $2.Do the poor benefit from the generosity of the rich?

My answer is graphed below.  I graphed the rich demand curve as half of the poor so it lays below the poor.  Suppose the supply curve is vertical at 7.  If the market price is $2 then the poor get 7 bushels for a $1 so they are better off.  If the supply curve is horizontal at $2, then the poor are worse off.  Now the poor 5 bushels instead of 7.  

I think my answers are correct.  I think the intent of the curve is that the philanthropist should know the elasticity of demand for the good that they are helping to supply.

Over the last couple of month, I have written several articles for the African Star News.  The articles deal with economic growth in Africa.  You can find a link the articles on the right hand side of my blog under "Favorite Blogs".  I have also been reading deeply about oligopoly behavior and working those problems.  As a result, my posts have been infrequent.  I suspect that my frequency will continue to be erratic as I continue my study.  


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