Eco 201
Problem Set 2
Name_______________________________
13 September 2011
1. When the price of Apple computers goes down, what probably happens to the demand for
Windows-based computers?
The demand for Windows-based computers probably falls. This means the entire demand
curve shifts down or to the left. The demand for Windows-based computers falls when
the price of Macs goes down because Windows-based computers and Macs are substitutes.
Thus, when the price of Macs goes down, people switch to buying more Macs and fewer
Windows-based computers at any particular price.
2. For each of the following pairs of products, state which are complements, are substitutes,
and which are unrelated.
Products
Pepsi and Coke
Oscar Mayer hot dogs and Wonder hot dog buns
Jif peanut butter and Smucker’s strawberry jam
iPods and Texas Instruments financial calculators
Dell computers and Dell printers
Ford Explorers and Firestone Tires
GMC Sierra pick-up and Ford Mustang
Sunkist oranges and Grey Goose vodka
Heineken Beer and Liz Claiborne shirt
Crayola crayons and SanDisk USB flash drives
Complements Substitutes
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Unrelated
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3. Suppose the data in the following table present the price of a base model Nissan Altima
midsize family sedan and the quantity of Altimas sold. Do these data indicate that the demand
curve for Altimas is upward sloping? Explain.
YEAR PRICE QUANTITY
2005 $19,865
325,265
2006
20,325
330,648
2007
20,765
352,666
Two possible explanations can explain why the sales of Altimas have increased, both that are
consistent with downward sloping demand curves.
First, the demand curve for the Altima could be shifting to the right during this period of
time, as consumers switch to the stylish, fuel-efficient mid-size sedan.
Second, it is possible that after adjusting for inflation the price of the Altima has declined.
Indeed, the table above confirms that the real price (price adjusted for inflation) of the Altima
has fallen from 2005 to 2007. So even without a shift in the demand schedule, the lower price
(relative to other goods) could explain the increase in the quantity of Altimas sold.
YEAR PRICE Price in 2007 Dollars*
2005 $19,865
$21,176
2006
20,325
20,804
2007
20,765
20,765
* Using July CPI for 2005, 2006, 2007.
4. Your instructor started a job on 1 March 1973. The job paid $1.85 per hour at the time when
the minimum wage was $1.60. The CPI for March 1973 is 43.3. The CPI for July 2011 is
225.922.
What is the 1973 wage in July 2011 dollars?
Wage in 2011 = Wage in 1973 x (225.922/43.3) = $1.85(5.22) = $9.65
What is the 1973 minimum wage in July 2011 dollars?
Wage in 2011 = Wage in 1973 x (225.922/43.3) = $1.60(5.22) = $8.35
5. On 1 January 1976, the minimum wage was raised to $2.30. The CPI for January 1976 is
55.6. The CPI for July 2011 is 225.922
What is the 1976 minimum wage in July 2011 dollars?
Wage in 2011 = Wage in 1976 x (225.922/55.6) = $2.30(4.06) = $9.35
6. State whether each of the following events will result in a movement along the demand curve
for McDonald’s Big Mac hamburgers or whether it will cause the curve to shift. If the demand
curve shifts, indicate whether it will shift to the left or to the right and draw a graph to illustrate
the shift.
a. The price of Burger King’s Whopper hamburger declines.
A decline in the price of a
substitute—the Whopper—
reduces the demand for the Big
Mac, shifting the demand to the
left. At every price, the quantity
of Big Macs purchased will
decline.
b. McDonald’s distributes coupons for $1.00 off on a purchase of a Big Mac.
A coupon is a decrease in the
price of the Big Mac, increasing
the quantity of Big Macs
demanded.
c. Because of a shortage of potatoes, the price of French fries increases.
An increase in the price of a
complement—French fries—
reduces the demand for the
Big Mac, shifting the demand
to the left. At every price,
the quantity of Big Macs
purchased will decline.
d. Kentucky Fried Chicken raises the price of a bucket of fried chicken.
An increase in the price of a
substitute—Kentucky Fried
Chicken—increases the
demand for the Big Mac,
shifting the demand to the
right. At every price, the
quantity of Big Macs
purchased will increase.
7. Suppose that 1,000 people in a market each have the same monthly demand curve for bottled
water, given by the equation QD = 100 - 25P, where P is the price for a 12-ounce bottle in
dollars.
a. How many bottles would be demanded in the entire market if the price is $1.00?
At P = 1, QD = 1000 (75) = 75,000.
b. How many bottles would be demanded in the entire market if the price is $2.00?
At P = 2, QD = 1000 (50) = 50,000.
c. Provide an equation for the market demand curve, showing how the market quantity
demanded by all 1,000 consumers depends on the price.
The demand function for the entire market is QD = 100,000 – 25,000P
8. Let’s think about the demand for plasma TVs.
a. If the price for a 50" plasma TV is $2,010, and Newhart would be willing to pay $3,000,
what is Newhart’s consumer surplus?
Individual consumer
surplus = $990
b. Consider the figure below for the total demand for plasma TVs. At $2,010 per TV, 1,200
TVs were demanded, what would be the total consumer surplus?
Total consumer surplus =
$1,794,000: It’s CS = ½ (Base
× Height).
The short, vertical dashed
line below reflects Newhart’s
consumer surplus: $990,
which is $3,000–$2,010.
9.
Demand for park visits is Q*0 = 10,000 – 100P. If park visits are free, how many visitors
will attend? How will your answer change if the park adds a $20.00 admission fee? Show
using a graph.
When park visits are free, the equilibrium quantity is 10,000 = 10,000 – 100(0). With a
$20.00 entrance fee, quantity of visits demanded falls to 8,000.