Download Answer Key to Practice Problem Set 1

Answer Key to Practice Problem Set 1
1.
Western is trying to decide between 3 building projects that all will run about $1 million. Their first
choice is to build a Journalism building. The second choice is to build a new parking deck. The third
choice is to build a new arena. What is the opportunity cost of building the journalism building?
Forgoing a parking deck (the $1 million does not count in the cost since it is spent on
both the first and second options)
2. Suppose that in one hour Gilligan can gather the following quantities of coconuts or bunches of berries.
Coconuts
Berries
0
30
1
28
2
21
3
12
4
0
Draw his production possibilities frontier.
A.
Coconuts 4
30 Berries
B. What is the opportunity cost of the 1st coconut? 2 berries
c. What can we say about the point where Gilligan gathers 2 coconuts and 14 bunches of berries?
What about a point where he would gather 2 coconuts and 20 bunches of berries?
C. both points are inefficient since they are inside of his ppf
D. What is happening to his opportunity cost as he gathers more and more coconuts? it is increasing
E. e. How would the PPF look different if instead of the above chart, Gilligan gave up 1 coconut for
every 3 bunches of berries, no matter how many of each he gathers? How has his opportunity cost
now changed? the ppf would now be a straight line rather than a curved one indicating
constant opportunity cost of 3 berries for each coconut (or 1/3 coconut for each berry)
3. Suppose that the quantity demanded and the quantity supplied of DVD players at different prices are
given below.
Price
Quantity Supplied
Quantity Demanded
$50
3,000
12,000
100
4,000
10,000
150
5,000
8,000
200
6,000
6,000
250
7,000
4,000
300
8,000
2,000
a. What is the equilibrium quantity and price of DVD players exchanged without any government
intervention?
b. Suppose the government has established a price ceiling of $100. What will the price and
quantity of
DVD players demanded and supplied be? What is happening as a result of this price ceiling?
c. Explain what will happen if the price ceiling is abolished. Be specific. What will happen to the
quantity
of DVD players demanded and supplied? To the price of DVD players? Why?
d. Graph the supply and demand curves for DVD players. Be sure to show the equilibrium p and
q.
e. What factors might cause the S to shift? demand?
a. P=$200, Q= 6,000
b. Qs = 4,000, Qd = 10,000, a shortage of 6,000 DVD players has occurred
c. The price of DVD players will increase, the Qs will increase as profit potential
increases for suppliers, Qd will fall as the op. Cost of buying a DVD player
increases. Price will stop rising at $200 where the market clears
d.
DVD players
Price
$200
S
D
6,000 Quantity
e. Things that could cause the demand curve to shift:
1. a change in population
2. a change in income
3. a change in the price of related goods
4. a change in the expected future price
5. a change in tastes
Things that could cause the supply curve to shift
1. new technology
2. a change in the price of inputs
3. a change in the price of alternate outputs
4. a change in the number of firms in the industry
5. a change in the expected future price
4. Explain what would happen to the Supply or Demand and to the equilibrium P and Q in the corvette
industry if each of the following occurred:
a. new technology was invented to cheapen the production of corvettes
b. the economy goes into recession and people’s incomes fall
c. wages for corvette manufacturers increase and at the same time the population doubles
d. a consumer report is released which says driving a corvette increases your risk of death in an
automobile
accident
a.
b.
c.
d.
supply increases, P falls, Q increases
demand falls (assuming corvettes are a normal good), P falls, Q falls
supply decreases, demand increases, P increases, we don’t know about Q
demand falls, P falls, Q falls
5. Explain what would happen to the Supply or Demand and to the equilibrium P and Q in the personal
desktop computer industry if each of the following occurred:
a. new technology was invented to cheapen the production of PC’s S p q
b. the economy is booming and people’s incomes are rising (computers are normal goods) D p q
c. wages for computer manufacturers have decreased and at the same time the population doubles S D
p? q
d. A consumer report is released which says owning a computer increases your child’s IQ scores by
10%.Dpq
e. The price of notebook computers falls D p q
6. The demand and supply of sunglasses (measured in millions) in the Republic of Rayban is given by the
following equations.
a. Find the equilibrium quantity and price of sunglasses. Include a graphical analysis of the
equilibrium including at least 2 points on each curve.
D: P = 120 - 8Q
S: P = 30 + 2Q
b. Suppose a price floor of $50 is set by the Republic of Rayban. What is the Excess Demand or
Excess Supply? What is the quantity of sunglasses sold? Draw the price floor on the graph.
c. Suppose a price ceiling of $40 is set by the Republic of Rayban. What is the Excess Demand
or Excess Supply? What is the quantity of sunglasses sold? Draw the price ceiling on the graph.
d. Suppose a price ceiling of $55 is set by the Republic of Rayban. What is the Excess Demand or
Excess Supply? What is the quantity of sunglasses sold? Draw the price ceiling on the graph.
1. a. 120-8Q=30+2Q
so 90Q= 10P
Q= 9, P = 120-8(9)=$48
sunglasses
Price
120
48
30
S
D
9
Quantity
b. Qd=8.75 Qs=10 so the surplus or excess supply is 1.25, 8.75 sunglasses will be sold
sunglasses
Price
120
S
50
48
30
D
8.75
Quantity
c. Qd=10 Qs=5, excess demand is 5, 5 sunglasses will be sold
sunglasses
Price
120
S
48
40
30
D
Quantity
5
d. There will be no excess demand or supply. The price ceiling is above the equilibrium
price so it becomes ineffective
sunglasses
Price
120
55
48
30
S
D
9 Quantity
7. Suppose the following is my production possibilities frontier for cooking toast and pancakes in one
hour.
Pancakes
Toast
0
40
2
39
4
37
6
33
8
27
10
20
12
11
14
0
a. Graph my production possibilities frontier.
Pancakes
14
40
Toast
What can be said about the point 30 toast, 8 pancakes? Unattainable with current resources and
technology What can be said about the point 10 toast, 12 pancakes? Inefficient
What happens to the Production Possibilities frontier if I get a new griddle that speeds up
production of pancakes?
Pancakes
14
40
Toast
b. What is the opportunity cost of the first pancake approximately? ½ piece toast
Of the first piece of toast? 2/11 pancakes
Does the law of increasing opportunity costs apply here? Yes