Northeastern University – ECON 1115 – Principles of Macro – Fall 2021

Homework #3 Due date: Thursday Sep 30, by 11:59 pm

• You may complete this assignment individually or with a group; in either case every student must turn in
their own copy.
• If you miss the due date, you may submit your assignment within the next 24 hours, although there is a
penalty for late submission
• Please upload your assignment answers into Canvas. Your answers can be in Word, PDF, or Excel.
• Show work for partial credit.

1. Suppose the following table shows the quantity of laundry detergent that is demanded and supplied at
various prices in Country 1:
Price ($) Quantity Demanded (mill oz.) Quantity Supplied (mill. oz.)

2 65 35

4 60 40

6 55 45
8 50 50

10 45 55

12 40 60

14 35 65

a) Use the data in the table to draw the demand and supply curves in Country 1's market for laundry
detergent.

Demand Supply

Mill 70Oz.

Mill 52.5Oz.

Mill 35Oz.

Mill 17.5Oz.

Mill 0Oz.
2 4 6 8 10 12 14
 The graph above is representative of the data table, where;

- X- axis; Price in dollars

- Y-axis; quantity in mill. Oz

b) What is equilibrium price and quantity?

The equilibrium price is 8 dollars, and the equilibrium quantity is 50 mill. Oz

c) The following tables give the demand and supply schedules for two of Country 1's neighbors, Country
2 and Country 3. Suppose these three countries form an economic union and integrate their markets. Use
the data in the tables to plot the market demand and supply curves in the new economic union.

Demand Supply

Mill 140Oz.

Mill 105Oz.

Mill 70Oz.

Mill 35Oz.

Mill 0Oz.
2 4 6 8 10 12 14

d) What is the equilibrium price and quantity in the union?

- Equilibrium Price- $8
- Equilibrium Quantity- 95 mill. Oz
 Country 2:
Price ($) Quantity Demanded (mill oz.) Quantity Supplied (mill. oz.)

2 35 5

4 30 10

6 25 15

8 20 20

10 15 25

12 10 30

14 5 35

Country 3:
Price ($) Quantity Demanded (mill oz.) Quantity Supplied (mill. oz.)

2 40 10

4 35 15

6 30 20

8 25 25

10 20 30

12 15 35

14 10 40

2. Helium is lighter than air and thus can be used to make party balloons float. Helium is also an inert gas
that is vital for many recently-developed industrial applications such as medical imaging technology that
require achieving very low temperatures. What effect do you think these relatively new industrial
applications have had on the demand for helium? What has likely happened to the price of party balloons as
a result?
The supply for party balloons has decreased as a crucial ingredient in their production (helium) now costs
more, due to its higher demand for use in medical technology while the supply remains the same. Hence, the
allocated supply of helium for party balloons has decreased, while the demand of party balloons apparently
remains the same, which causes the equilibrium price to shift up, hence making party balloons more
expensive.
3. New York decides to reduce the consumption of sugary soda drinks by imposing a minimum price of
$2.50 per 12 oz; the equilibrium price was previously $1.50. Sketch the supply and demand curves for soda
and show the effect of this policy, with excess supply clearly labeled.

4. By how much would GDP change as a result of each of the following changes? Briefly explain your
answers.
a) A parent switches from buying pre-made sandwiches for a family dinner, which would have cost
$20, to buying the raw ingredients, which only cost $6, and making the sandwiches at home.

GDP changes by -$14 using the expenditure approach, as now the initial expenditure (E1 = 20, buying
sandwiches from outside) is subtracted by the second expenditure (E2= 6, making the sandwiches at
home);

E1- E2 = 20 - 6 = 14
The difference is 14, and since the expenditure declines by 14 dollars, the GDP change = -14

b) A rock star marries her butler, whom she formerly paid $50,000 per year, and he continues to wait on
her as before and she supports him financially but does not pay him a salary.
Using the income approach, the GDP is I2 (the new income, which is zero) subtracted by the initial
income I1 ($50,000) a year .

I2 - I1 = 0 - 50,000 = $-50,000/ year

As such, even though the butler is now supported financially, there is no actual income/expenditure
calculated since the couple’s financial exchange is no longer in a transactional manner.
c) A commuter switches from riding a bike to work to taking Uber three times per week at a cost of $8.50
for each one-way ride.

The expenditure approach would lead to us subtracting E2 - E1, (E2 being the expenditure of a one-way
Uber cab to work for a week, which is $8.50 x 3 = $25.50, and E1 being the initial expenditure using a
bike, 0)
E2 - E1 = $25.50 - $0 = $25.50/week
If this question includes the cab back (I am unclear as to the question in this regard), then if the
expenditure is assumed to be the same, it will be $25.50 x 2 which is $51/week.
d) Ford builds a $40,000 Mustang this year but does not sell it until next year.
Using the production approach, we can see that Ford has no sales revenue this year- they only have a
$40,000 expenditure; as such, the sales revenue is subtracted by the production cost in order to get the
value added.

Sales revenue (S1)- Production (P1)= $0 - $40,000 = -$40,000

This will, of course, change when the product is sold.