Download Practice Problems – Chapter 6, 7, 8, 9, 10 Chapter 6 1. The price of

Practice Problems – Chapter 6, 7, 8, 9, 10
Chapter 6
1. The price of good x increases from $5 to $10 and quantity demanded decreases from 100 to 80
units. Calculate price elasticity of demand and interpret the result.
2. The price of good y decreases by 10% and quantity demanded increases by 15%. Calculate price
elasticity of demand and interpret the result.
3. The price of tablets increases from $90 to $120 and the quantity demanded for notebooks
increases from 300 to 350 units. Calculate cross price elasticity of demand and interpret the
result.
4. The price of good y decreases by 10% and the quantity demanded for good x increases by 10%.
Calculate the cross price elasticity of demand and interpret the result.
5. Income decreases from $40,000 to $35,000 and quantity demanded for good x increases from
100 to 120 units. Calculate income elasticity of demand and interpret the result.
6. Income increases by 100% and quantity demanded for good x increases by 20%. Calculate
income elasticity of demand and interpret the result.
7. The price of barley increases from $30 to $40 per unit and quantity supplied increases from 100
to 200 units. Calculate price elasticity of supply and interpret the result.
8. The price of water increases by 5% and quantity supplied increases by 5%. Calculate the price
elasticity of supply and interpret the result.
9. If a good has many close substitutes then consumers tend to be more sensitive to changes in
price for that good (elastic demand). Explain why.
10. If producers have more time to adjust to price changes, will supply be more or less elastic?
Explain.
Chapter 7
11. An excise tax is placed either on the production or purchase of a good (on producers of
consumers). The market in the following diagram shows an excise tax placed on producers. For
convenience, the supply curve with excise tax added is shown with a dotted line. Determine and
show the following on the graph:
a. Before-tax equilibrium quantity
b. Before-tax equilibrium price
c. The “tax wedge”
d. Demand price
e. Supply price
f. Transacted quantity after tax
g. Amount of the excise tax
Then calculate the following and show the areas on the graph:
h.
i.
j.
k.
Tax revenue
Deadweight loss
Consumer surplus
Producer surplus
12.
Determine, using the
graph, if the supply curve shown is inelastic or elastic. Hint: choose any price and quantity
combination on the curve, then change the price and observe by how much quantity changes.
13.
Determine, using the graph, if the
demand curve shown is inelastic or elastic. Hint: choose any price and quantity combination on
the curve, then change the price and observe by how much the quantity changes.
14.
Why will deadweight loss become smaller
when demand and/or supply become more inelastic? Use graphs in your explanation if
necessary. Notice also how tax revenue changes with elasticity.
Chapter 8
15. What are the sources of comparative advantage? What does it mean for a country to have
comparative advantage in production of a good?
16. What does gains from trade really mean?
17. The following is a diagram of the market for hops. Initially, the market is closed to international
trade and the price is PA. If open to the world market, the prevailing price is PW. Determine or
show the following:
a. domestic QD before and after opened to world trade
b. domestic QS before and after opened to world trade
c. Show whether there will be exports or imports.
d. Calculate and show on the graph
i. Consumer surplus
ii. Producer surplus
e. Does opening to world trade benefit consumers? Producers? Overall, is the economy
better off? Show it on the graph.
18.
Sketch a graph similar to that
of the previous question, except for the world price PW – make it be higher than PA. Find and
show everything you did in the previous problem.
19. How would an economy engage in trade protection? (Two possible options). What are the
reasons for trade protection? How would you argue against trade protection?
Chapter 9
20. You are currently working as a consultant and earning $50,000. You are considering opening
your own small business that produces personalized coffee mugs. If you open the business, your
yearly sales will total $1,200,000. Expenses include manufacturing costs of $500,000, marketing
cost of $300,000, online sales cost of $100,000, and payroll of $150,000. Make a list of the
following (based on opening the small business):
a. Revenues
b. Explicit costs
c. Implicit costs
Calculate the following:
d. Accounting profit
e. Economic profit
Based on economic profit, should you open the small business? If so, how much more
profitable is the small business than the next best alternative? If no, How much less
profitable?
21. You have two alternatives, A and B. You calculate the economic profit associated with choice A
to be zero. What does that mean? Which alternative should you choose?
22. The following table shows the total cost and total benefit associated with watching additional
hours of Netflix.
a. Calculate marginal cost, marginal benefit, marginal profit, and total profit.
b. Determine the optimal quantity of hours of Netflix
c. Sketch a graph of the situation, placing hours of Netflix on the horizontal axis and
MB&MC on the vertical axis. Graph MB and MC. Show the optimal quantity.
Total
Total
Total
Quantity Benefit
Cost
MB MC MP Profit
0
0
0 ~~ ~~ ~~
1
10
2
2
18
6
3
24
12
4
28
20
5
30
30
6
30
42
Chapter 10
23. Bob has $10 to spend. He can buy oranges for $2 each and apples for $1 each. Bob’s utility level
for apples and oranges are shown in the following table.
a. Sketch a graph of his budget line
b. Calculate the utility levels associated with each consumption bundle
c. Determine the optimal consumption bundle based on the budget line and associated
utility levels
Quantity
Quantity
of
Utility
of
Utility
Apples
Level
Oranges
Level
0
0
0
0
1
100
1
300
2
190
2
450
3
270
3
550
4
340
4
600
5
430
5
625
6
490
6
650
7
540
7
675
8
630
8
700
9
670
9
725
10
700
10
750
24. Using the information in the previous question, and the associated tables:
a. Calculate Bob’s marginal utility levels for apples and oranges
b. Calculate marginal utility per dollar for each utility level
c. Determine Bob’s optimal consumption bundle using the marginal utility per dollar
method.
Quantity
of
Apples
0
1
2
3
4
5
6
7
8
9
10
Utility
Level
MU
0
100
190
270
340
430
490
540
630
670
700
MU/$
Quantity
of
Oranges
0
1
2
3
4
5
6
7
8
9
10
Utility
Level
0
300
450
550
600
625
650
675
700
725
750
MU
MU/$