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ECON 101
Fall 2002-03
HW I
1) Assume the production possibility frontier below:
B
300
Wheat
C
D
100
Soybeans
a.
b.
c.
d.
200
400
What is the opportunity cost of moving from D to B?
What is the opportunity cost of moving from B to C?
Define efficiency.
Which point represents potential improvement in efficiency?
2) The following are the assumed supply and demand schedules for hamburgers in Collegetown:
Price
$2.00
1.75
1.50
1.25
1.00
0.75
Quantity
Demanded
6,000
8,000
10,000
12,000
14,000
16,000
Quantity
Supplied
15,000
14,000
13,000
12,000
11,000
10,000
a. Plot the supply and demand curves and determine the equilibrium price and quantity.
b. What effect would a decrease in the price of beef (a factor of production) have on the
equilibrium price and quantity of hamburgers, ceteris paribus? Explain referring to the
graph.
c. What effect would an increase in the price of pizza (a substitute commodity) have on the
equilibrium price and quantity of hamburgers, again ceteris paribus? Explain referring to
the graph.
3) The city of Whatson Transit Authority runs the only bus company in the city. The current
price of a bus ticket is $1.25 and 800,000 tickets are sold each week. An economic study has
found the demand elasticity of tickets to be d=0.85.
a.
b.
c.
d.
Is demand elastic, unit elastic or inelastic?
What is the total revenue for bus ticket sales?
Should the Transit Authority increase or decrease ticket prices to increase total revenue?
Suppose that the city wants to increase bus ridership by 10% for environmental reasons.
What price level will accomplish this increase? [Hint: use the most general definition for
demand elasticity to find percent change in price, then find the new price.]
4) The graph below represents the market for bread in Ankara.
S
P
200,000
150,000
100,000
50,000
50000
D
1
2
3
4
5
6
7
Q (millions of units)
a. What is the equilibrium Price and Quantity?
Suppose that to insure that everyone can afford bread, which is a basic necessity, the government sets
a maximum market price of 50,000 TL.
b. This policy is an example of a price (floor or ceiling).
c. The quantity of bread demanded under this policy is _______, the quantity supplied is
_______, resulting in an excess ___________ of ______ million units.
d. If a black market for bread were established, what would the likely black market price of
bread be?
e. How much of a subsidy per unit would the government have to make in order for there the
quantity supplied to equal the quantity demanded with a price of 50,000 TL?
5) Briefly explain why most goods possess diminishing marginal utility. Also explain why this
means that a typical individual’s demand curve for a good is downward sloping.
6) Pohl Manufacturing Company finds that as it increases the number of workers it hires, the
number of tennis balls produced daily changes as follows:
Workers
1
2
3
4
5
6
7
8
9
10
Tennis Balls
10
30
60
100
135
165
190
210
225
235
a.
b.
c.
d.
e.
f.
g.
11
240
12
240
13
235
The price of balls can be 2, 3 or 4 TL each. For each number of workers calculate the
marginal physical product, the APP, and the three MRP.
Plot the MPP and APP
On the graph, show the phases of increasing returns, diminishing returns, and negative
returns
Assume that the price of tennis balls is 2 TL. If the wage rate of labor is 40 TL per day,
how many workers will Pohl hire?
What happens to the employment level when the wage rate goes up to 60 TL?
If the wage stays at 60, how does employment change when the price of balls rise to first 3
TL and then 4 TL?
Looking at your graph, explain how you can have decreasing MPP in the range of an
increasing APP.
7) Before the American Revolution, the British required the American Colonies to follow certain
rules known as the Navigation Acts. One of the rules required that all imports to the colonies
from outside of the British Empire had to be shipped first to Great Britain. For instance, a
colonial business in New York importing wine from France had to have the wine shipped first
from France to Great Britain before it could be shipped to New York. This requirement
increased the cost of importing goods into the colonies. Draw a graph to show the loss in
economic efficiency from the Navigation Act on importation of wine into New York.