Assignment 4: Supply & Demand Problems

A key (perhaps the key) tool used by economists is theories (or models). We start with the theories of demand and supply, which is what economists use to analyze markets. It is imperative that you learn how to do this. The way you learn is by practicing, so here is a problem to practice on in your study group.

Part 1: The local internet service provider replaces its dialup service with broadband service. How should that affect supply, demand, and the equilibrium price and quantity? Show graphically and explain. (You may hand draw your graph, take a picture and attach it to your submission, or you may do something more sophisticated.)

Part 2: The state government offers a subsidy to internet broadband service since they believe that internet access is a utility, like electricity which is necessary for all citizens. How should this affect supply, demand, and the equilibrium price and quantity? Show graphically and explain.

Part 3: Suppose both of the above events occur. What is the combined impact on supply, demand, and the equilibrium price and quantity? Show graphically and explain.

Note 1: This is a group assignment.  You must do this as a group. I won’t accept submissions from individuals.

Note 2: Even though this problem has three parts, you should not simply have one person in your group do each part. Each person needs to understand the entire problem, i.e. all three parts, and indeed, you all need to agree that your working of the problem is correct.

When you are satisfied with your answer, email me one document with your group’s submission and the names of the people who contributed.  The deadline is Monday, Sept 19.