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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/$