AP Macroeconomics Page 1 of 5

Assignment: Apply Tools of Market Analysis

Giang Bui Young Kim
User Name:_______________ Instructor: _________________ Date:__________
10/31/2023
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1. A very important economic relationship is that between elasticity and revenue.

A. Consider the market for gasoline. Because there are very few good substitutes for
gasoline, the demand for gasoline is probably inelastic.

i. If the price of gasoline rises by 10%, by what percentage is the quantity

demanded likely to fall? (4 points)

ii. Suppose the price of gasoline rises by 10% and, as a result, the quantity
demanded falls by 5%. Will consumer expenditures on gasoline rise or
will they fall? (4 points)

B. Now, consider demand for the gasoline sold by Gas Station G in a large city. The
gasoline sold by other stations is an excellent substitute for the gasoline sold by
Station G. Because there are many good substitutes for gasoline, its demand is
probably elastic.

i. If the price at Gas Station G rises by 10%, by what percentage is its

quantity sold likely to change, other things being the same? (4 points)

ii. In this case, what will happen to Station G's revenues when the price
rises? (4 points)

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AP Macroeconomics Page 2 of 5
Assignment: Apply Tools of Market Analysis

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C. Make a general statement about how revenues will change when the price
rises or when it falls if demand is elastic and if it is inelastic. (4 points)

D. It is often suggested that increasing gasoline taxes will reduce the quantity
of gasoline people will buy and, as a result, reduce air pollution. In the short
run would such a policy be effective in reducing air pollution? Would the
policy be effective in reducing air pollution in the long run? Why? (6 points)

2. Attempts at controlling illegal drugs are usually targeted at suppliers. How effective is
this likely to be? Let’s think about it.

A. Assuming this initial statement is true, show the effect of increased

enforcement activities on the market for illegal drugs. Use a demand and
supply graph in your explanation. What are the effects on the market price
and quantity? (2 points)

B. Discuss why, in your opinion, the demand for illegal drugs might be elastic
or inelastic. (2 points)

C. Elasticity of demand determines whether price increases result in more or

less total spending by buyers. Would the dealer find it profitable (consider
costs) to elude law enforcement if demand was elastic? Inelastic? (2 points)

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AP Macroeconomics Page 3 of 5
Assignment: Apply Tools of Market Analysis

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3. The labor market is very important in macroeconomics. Although there are many
different types of labor, and different areas in which it’s offered, let’s assume that there
is just one labor market and one wage.

A. In good economic times, demand for labor increases. Show in a supply and
demand diagram the effect of this increase on wages and the total quantity
of labor exchanged. (2 points)

B. Many countries have large numbers of immigrants each year. These

immigrants have typically moved to a new country to find work. Show in a
supply and demand diagram the effect of this immigration on wages and the
total quantity of labor exchanged. (2 points)

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AP Macroeconomics Page 4 of 5
Assignment: Apply Tools of Market Analysis

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C. When economic conditions turn bad, the demand for labor usually
decreases. However, many people are hesitant to take jobs for less than
they made in the past, meaning that wages don't easily fall. Use a supply
and demand diagram to show the effect of this phenomenon. Is the effect
more similar to that of a price ceiling or of a price floor? (4 points)

D. Explain how markets usually move toward equilibrium after a decrease in

demand and why, in the situation discussed in part C above, this equilibrium
isn't achieved. (4 points)

4. Another market that is very important in macroeconomics is the market for credit, often
referred to as a money market or loanable funds market. In this market, the buyers are
people who borrow money, and the sellers are people who lend money. The price of
money, or the price of using someone else’s money for some amount of time, is the
interest rate. The interest rate is the price in the market for credit.

A. Explain what a downward-sloping demand curve means in the context of

the credit market. (3 points)

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AP Macroeconomics Page 5 of 5
Assignment: Apply Tools of Market Analysis

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B. Explain what an upward-sloping supply curve means in the context of the

credit market. (3 points)

C. Some governments limit the rate of interest that may be charged on a loan.
In these places it may be illegal for a lender to charge a rate of interest
above a certain level. Use a supply and demand diagram to show the effect
of these limits, assuming that the limit is below the equilibrium interest
rate. (5 points)

D. What will this do to the total quantity of lending and borrowing done? (5
points)

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