Download EC1000 – Question Sheet 2 – Week 6

EC1000 – Question Sheet 2 – Week 6
1. Your aunt is thinking about opening a hardware store. She estimates that it would cost
£500,000 per year to rent the location and buy the stock. In addition, she would have to quit
her £50,000 per year job as an accountant.
a. Define opportunity cost.
b. What is your aunt’s opportunity cost of running a hardware store for a year? If your aunt
thought she could sell £530,000 of merchandise in a year, should she open the store? Explain.
2. Your cousin Vinnie owns a painting company with fixed costs of £200 and the following
schedule for variable costs:
Quantity of Houses
Painted per Month
Variable Costs
1
2
£10 £20
3
4
5
6
7
£40
£80
£160 £320 £640
Calculate average fixed cost, average variable cost, and average total cost for each quantity.
What is the efficient scale of the painting company?
3. You go out to the best restaurant in town and order a lobster dinner for £40.
After eating half of the lobster, you realize that you are quite full. Your date wants you to
finish your dinner, because you can’t take it home and because “you’ve already paid for it.”
What should you do? Relate your answer to the notion of sunk and recoverable costs.
4. Singer Britney Spears has monopoly over a scarce resource: herself. She is the only person
who can produce a Britney Spears concert. Does this fact imply that the government should
regulate the price of her contests? Why or why not?
5. Suppose that you and a classmate are assigned a project on which you will
receive one combined grade. You each want to receive a good grade, but you also want to
do as little work as possible. The decision box and payoffs are as follows:
Your decision
Work
Shirk
You get A, no fun
You get B, fun
Classmate gets A, no fun
You get B, no fun
Classmate gets B, no fun
You get D, fun
Classmate gets B, fun
Classmate gets D, fun
Work
Your classmate’s
decision
Shirk
Assume that having fun is your normal state, but having no fun is as unpleasant as receiving a
grade that is two letters lower.
a. Write out the decision box that combines the letter grade and the amount of fun you have
into a single payoff for each outcome.
b. If neither you nor your classmate knows how much work the other person is doing, what is
the likely outcome? Does it matter whether you are likely to work with this person again?
Explain your answer.
EC1000 – Question Sheet 2 – Week 6
6. Chapter 16 states that a ban on cigarette advertising on television enacted in the US in
1971 increased the profits of cigarette companies. Could the ban still be good public policy?
Explain your answer.
7. “An increase in the demand for notebooks raises the quantity of notebooks demanded, but
not the quantity supplied.” Is this statement true or false? Explain.
8. Consider the market for minivans. For each of the events listed here, identify which of the
determinants of demand or supply are affected. Also indicate whether demand or supply is
increased or decreased. Then show the effect on the price and quantity of minivans.
a. People decide to have more children.
b. Increased demand of steel in China raises steel prices.
c. Engineers develop new automated machinery for the production of minivans.
d. The price of sports utility vehicles rises.
e. A stock-market crash lowers people's wealth.
9. Suppose that in the year 2010 the number of births is temporarily high. How does this baby
boom affect the price of baby-sitting services in 2015 and 2025? (Hint: 5-year-olds need
babysitters, whereas 15-year-olds can be baby-sitters.)
10. Suppose that the price of Leicester Tigers tickets is determined by market forces.
Currently, the demand and supply schedules are as follows:
Price
£15
£20
£25
£30
Quantity Demanded
20,000
16,000
12,000
8,000
Quantity Supplied
16,000
16,000
16,000
16,000
a. Draw the demand and supply curves. What is unusual about this supply curve? Why might
this be true?
b. What are the equilibrium price and quantity of tickets?
c. Suppose that demand increases by 8,000 units at any price. What are the new equilibrium
price and quantity?
11. Because better weather makes farmland more productive, farmland in regions with goad
weather conditions is more expensive than farmland in regions with bad weather conditions.
Over time, however, as advances in technology have made all farmland more productive, the
price of farmland (adjusted for overall inflation) has fallen. Use the concept of elasticity to
explain why productivity and farmland prices are positively related across space but
negatively related over time.
EC1000 – Question Sheet 2 – Week 6
12. A recent study found that the demand and supply schedules for Frisbees are as follows:
Price per Frisbee
£10
£9
£8
£7
Quantity Demanded
(millions)
2
4
6
8
Quantity Supplied
(millions)
12
9
6
3
a. What are the equilibrium price and quantity of Frisbees?
b. Frisbee manufacturers persuade the government that Frisbee production improves
scientists' understanding of aerodynamics and thus is important for national security. A
concerned Congress votes to impose a price floor £2 above the equilibrium price. What is the
new market price? How many Frisbees are sold?
c. Irate college students march on London and demand a reduction in the price of Frisbees.
An even more concerned House of Commons votes to repeal the price floor and impose a
price ceiling £1 below the former price floor. What is the new market price? How many
Frisbees are sold?
13. The cost of producing stereo systems has fall over the past several decades. Let's consider
some implications of this fact.
a. Use a supply-and-demand diagram to show the effect of falling production costs on the
price and quantity of stereos sold.
b. In your diagram, show what happens to consumer surplus and producer surplus.
c. Suppose the supply of stereos is very elastic. Who benefits most from falling production
costs – consumers or producers of stereos?