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ECN 112
PRINCIPLES OF MICROECONOMICS
HOMEWORK 1 (CHAPTER 3) PROBLEMS
DUE: TUESDAY, FEBRUARY 10, 2015
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1. (a) What is the “Law of Demand”?
(b) In class, I said that demand curves always slope downward because of two specific “effects.”
Define and explain what these two effects are.
2. Explain the effect of each of the following on the demand curve for new computers:
(a) The price of computers falls by 30 percent.
(b) Total income (Y) in the economy rises.
3. Demonstrate in a supply and demand graph the likely effect of an increase in the price of gas
on the equilibrium quantity and equilibrium price of hybrid cars.
4. NOTE: In answering this question, draw and carefully label a set of axes. On the horizontal
axis of your graph, show the quantity of DVD rentals. On the vertical axis show the price per
DVD rental. Since I am not giving you specific data on prices and quantities, make a “freehand” drawing of the curve or curves you are asked to examine. Focus on the general shape and
position of the curve(s) before and after each event occurs. For each scenario, draw a new curve
that shows what happens in each of the circumstances. In particular, the curves could shift to the
left, shift to the right, or stay where they are.
(a) All other things unchanged, what happens to the demand curve for DVD rentals if there is:
i) an increase in the price of movie theater tickets;
ii) a decrease in family income;
iii) an increase in the price of DVD rentals?
(b) All other things unchanged, what happens to the supply curve for DVD rentals if there is:
i) an increase in wages paid to the clerks who sell DVDs;
ii) an increase in the price of DVD rentals;
iii) an increase in the number of DVD rental kiosks?
(c) What happens to the equilibrium price (P*) and the equilibrium quantity (Q*) of DVD rentals
if BOTH the price of movie theater tickets increases and the wages paid to DVD clerks
increases, ceteris paribus? Again, you don’t need actual numbers to arrive at an answer. Just
focus on the general position of the curve(s) before and after the event. (This is a trick
question—there are THREE possible outcomes to this scenario. Give me all three for full
credit.)
5. (a) Suppose the pizza industry is made up of three firms: The Mark Company, Mike, Inc.,
and Bill Enterprises. Use the information in the following table to construct the market supply
curve for pizza. Show the information in the table and in a graph.
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Mark’s Supply
Mike’s Supply
Bill’s Supply
Market Supply
Price
Q1
Q2
Q3
QS
5.00
25
30
20
5.50
30
40
25
5.75
35
50
30
6.00
40
60
35
6.25
45
70
40
(b) Suppose the market for pizza is made up of three consumers: Pedro, Curt, and Tim. Use the
information in the following table to construct the market demand curve for pizza. Show the
information in the table and in a graph.
Pedro’s Demand
Curt’s Demand
Tim’s Demand
Market Demand
Price
Q1
Q2
Q3
QD
5.00
30
80
45
5.50
25
70
40
5.75
20
60
35
6.00
15
50
30
6.25
10
40
25
(c) Now, put the curves from parts (a) and (b) together. In this economy, what is the equilibrium
price of pizzas? What is the equilibrium quantity? What would happen if Bill Enterprises shut
down? (By this I mean what happens to the curves?)
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