Midterm Review
Homework Assignment 5
1.
Max enjoys windsurfing (W) and snorkeling. He obtains the following total utility from each
of these sports:
Half-hours
(per month)
TUW
1
2
3
4
5
6
7
8
9
60
110
150
180
200
206
211
215
218
MU
TUS
MUS
20
38
53
64
70
75
79
82
84
(a)
Calculate Max’s marginal utility from windsurfing and from snorkeling. (You may add
this information to the above table with columns for the MU for windsurfing and the MU
for snorkeling.
(b)
If Max has $35 to spend, and equipment for windsurfing rents for $10 per half-hour, while
snorkeling equipment rents for $5 per half-hour, how long will Max choose to windsurf?
Snorkeling?
Why?
(c)
What is Max’s budget constraint? Explain verbally and write the equation for his budget
constraint below.
(d)
Now, suppose Max’s sister gives him $20 to send on his leisure pursuits, so he now has $55
to spend. How long will Max windsurf?
Snorkeling?
(e)
If Max has $55 to spend and the rent on windsurfing equipment is cut to $5 per half-hour,
how will Max now spend his time windsurfing?
Snorkeling?
Additional Problem 1: Utility Analysis
Assume that Maxi Mizer is trying to decide which combination of ice cream cones, Good A, and
magazines, Good B, she should purchase with her limited income of $20. Maxi's preferences for
ice cream cones and magazines, Goods A and B, are given in the table below. Further assume that
the prices of ice cream cones and magazines, Goods A and B, are $2 and $4 respectively. (You
may use the front and back of this page to complete your answer.
Unit of Good
1
2
3
4
5
6
7
Marginal Utility of
Ice Cream Cones (A)
20
16
14
12
10
8
6
Marginal Utility of
Magazines (B)
48
40
36
32
24
12
8
a)
How many ice cream cones and magazines will Maxi purchase?
(You must show all work to receive full credit).
b)
Now assume that the price of magazines falls to $2. How many ice cream cones and
magazines will Maxi purchase now? (You must show all work to receive full credit).
c)
On the basis of the information determined this far, determine the demand curve for
magazines. Provide a graph of the demand for magazines.
Does the demand for magazines follow the "law of demand"?
the "law of demand" and explain them briefly.
. Why?
(Yes;No) Give reasons to explain
1)
2)
3)
d)
Compute the price elasticity of demand for the price change for magazines indicated in part (b).
Interpret this elasticity coefficient and provide the formula for calculations for this price elasticity.
Additional Problem #3:
Consumer and Producer Surplus
Now consider the market for pizza. Suppose that the market demand for pizza is given by the
equation P = 40 – 4QD, and the market supply for pizza is given by the equation P = 10 + 2QS, where
QD = quantity demanded, QS = quantity supplied, P = price consumers pay (per pizza) and the price
producers receive (per pizza).
Graph the supply and demand schedules for pizza and indicate the equilibrium price and quantity.
(Your answer must contain your complete algebraic solution). Calculate the consumer surplus and
producer surplus and identify these areas in the graph below.(Be sure to label the axes and functions,
and number your intercepts.)
Equilibrium Price:
Equilibrium Quantity:
(Show your complete algebraic solution for the equilibrium price and quantity in the
space below.)
Consumer Surplus at Equilibrium:
(Show all work.)
Producer Surplus at Equilibrium:
(Show all work.)
Handout 2: Market Analysis
The table below gives the individual demands’ of Lisa and Chuck for movies:
Price / movie
$7
6
5
4
3
2
Quantity of movies demanded / mo.
Lisa
Chuck
1
2
3
4
5
6
0
0
0
1
2
3
a) Calculate the market demand for movies assuming that only Lisa and Chuck have individual
demands for movies. Explain this market demand.
b) Graph the market demand for movies found in (a). Does this market demand follow the “law
of demand.”? Explain and offer reasons for this law.
c) Calculate the price elasticity of demand for movies given your market demand in (a) for each
price change. Is demand elastic, unit elastic, inelastic? Explain in detail. (Show all your work
and give the complete elasticity formula).
d) Now, assume that 7 movies are offered per month. (1) Determine the market price for each
movie. Explain your reasoning. (2) If Chuck’s demand for movies increases, as shown below,
calculate the new market price for movies if 7 movies are offered per month.
Price / movie
Quantity of movies demanded/mo
Chuck
$7
6
5
4
3
2
0
0
1
3
4
6
What factor or factors could have increased Chuck’s demand for movies?
Additional Problem 3:
Market Analysis
Consider the market for bus service. First draw a graph depicting market equilibrium for bus
service. Then, for each of the events given below, analyze what effects each event will have on the
market equilibrium for bus service, i.e. effect on equilibrium price, equilibrium quantity, demand
or quantity demanded, supply or quantity supplied. You must draw separate graphs for each of the
following events. Remember to label all axes, functions, and equilibrium points in your graph
precisely.
(a)
Bus drivers go on strike in order to pressure their employers for wage increases.
(b)
The number of parking spaces decreases due to new land use planning requirements.
(c)
Employers with 100 or more employees offer subsidized bus passes to their employees.
(d)
Two thousand miles of Metrolink and commuter rail service are opened.
(e)
Congestion on the freeways increases with no plans to fund construction of new freeway
lanes.
Additional Problem 2:
Elasticity
For each of the elasticity cases given below, verbally explain what the elasticity coefficient means,
and offer an interpretation of the elasticity coefficient.
(a)
The income elasticity of movies is 3.41.
(b)
The price elasticity of tobacco is -0.61.
(c)
The cross price elasticity of popcorn with respect to the price of soft drinks is 2.38.
(d)
The price elasticity of rail service is 0.89.
(e)
The income elasticity of dental services is 1.00.
Additional Problem #1: Consumer and Producer Surplus
The graph below shows the demand and supply of rental housing for Microtown.
$/month
1200
1200
1000
S
800
600
400
200
D
0
1
2
3
4
5
6
Quantity
(thousands/month
a)
What is the equilibrium rent/month? ______________; the total rent/month
at the equilibrium quantity of rental units? _______________; the consumer
surplus? _______________; the producer surplus? _______________.
b)
What is the quantity of apartments that will be rented if a price ceiling is set at
$800? _________. What is the quantity of apartments that will be rented if a
price ceiling is set at $400? _________. What is the consumer surplus given
this price ceiling?
_________________;
the producer surplus?
_______________; the dead weight loss? ____________________; the search
cost for rental? ____________.
Additional Problem #2: Consumer and Producer Surplus
The graph below shows the market for anti-freeze. The government imposes a sales tax on
sellers of T.
$/gallon
a
12002
00 50
S+T
S
40
30
20
10
D
0
1
2
3
4
5
6
Quantity
(thousands of gallons)
a)
What is the equilibrium price/gallon without the tax? ______________; the
equilibrium quantity without the tax? __________________.
b)
What is the tax per gallon? ______________. How much revenue will the sales
tax raise? ______________.
c)
The tax decreases consumption by? ____________.
d)
What is the consumer surplus before the tax? _________________; after the
tax? _______________. What is the producer surplus before the tax?
____________; after the tax? _______________. What is the dead weight loss
associated with the tax? ____________________.
Handout 1: Production Possibilities
A certain economy only produces two goods, calculators (C) and tea (T). To manufacture these
goods, it has three kinds of resources: (1) a fixed quantity of capital, useful only in producing
calculators; (2) a fixed quantity of land, useful only in producing tea; and (3) a fixed quantity of
labor of 100 men (M) capable of working in either occupation. The table below indicates the
amounts of calculators and tea that can be produced when varying amounts of labor work with the
specialized resources, calculators and tea.
Number of
men
Daily production
of calculators
Number of
men
Daily production
of tea
0
10
20
30
40
50
60
70
80
90
100
0
40
105
200
300
390
450
500
550
580
600
0
10
20
30
40
50
60
70
80
90
100
0
5
12
20
28
36
43
49
54
58
60
1. Draw this economy’s production-possibility curve. (Be careful to label axes. Use of graph
paper will enable your graph to be more accurate.)
2. According to the table above, diminishing returns first appear in the production of calculators
when the total number of men employed rises to :
Explain what causes this diminishing returns phenomenon briefly.
3. What is the opportunity cost of producing 200 calculators instead of 40?
Explain the concept of opportunity cost briefly.
4. Assume that the production possibility curve above exists in 1985. Assume further that the
following (separate) events took place between 1985 and 2000. Other things being equal,
explain carefully how the production possibility curve would be altered.
a)
b)
c)
d)
The use of robotics technology is introduced into computer industry.
A strain of virus destroys a large percentage of tea plants worldwide.
Improved harvesting methods are employed in the tea industry.
Population growth continues at current positive rates over this period.