Download PracticeAssignment 2

Econ 1021a (570)
Practice Assignment 2
Fall 2013
Professor Ibbott
Chapters 4,5,6,9
1.
2.
3.
4.
5.
Suppose that the demand for widgets is given by Q d = 392 - 0.25P, while the supply of
widgets is estimated to Q s = -8 + 0.45P.
a. What is the elasticity of demand at the market equilibrium price?
b.What is the elasticity of supply at the market equilibrium price?
c. If supply increased, would industry revenue rise or fall?
Suppose that the average Canadian family’s income rises from $45,000 to $55,000 and
the number of automobiles per family rises from 1.7 to 2.3. What is the income
elasticity of demand for automobiles?
Suppose that the price elasticity of demand for movies is estimated to be 1.4 and the
price of a movie ticket is approximately $10. If the current quantity of movie tickets
sold is approximately 25 million, what will be the approximate impact of a $1 increase
in ticket prices on movie attendance? Will this increase cause movie revenues to rise or
fall?
The cross-price elasticity of demand for burgers with respect to French fries is
estimated to be -0.8, while the cross-price elasticity of demand for burgers with respect
to hot dogs is estimated to be 0.3.
a. If the price of French fries rises from 0.95 to 1.05, what will be the impact on the
demand for burgers?
b. If the price of hot dogs falls from $2.50 to $2.00, what will be the impact on the
demand for burgers?
Using the diagram below, determine the following:
a. Market Equilibrium P and Q.
b. Consumer Surplus and Producer Surplus.
c. Consumer Surplus and Producer Surplus if a price ceiling of $10 is established.
d. Black market price, value of search activity and DWL under a price ceiling of $10.
e. Consumer Surplus and Producer Surplus if a price floor of $10 is established.
f. Black market price, value of search activity and DWL under a price floor of $10.
g. DWL and cost to government of a price support that guarantees a price of $20.
h. DWL and cost of free provision by the government.
i. DWL and market price of a quota = 5,000.
6. A drop in the price of penicillin does not cause consumption to change. What does
this imply about the relative size of the substitution and income effects?
7. Suppose that a reduction in the price movies creates a large substitution effect from
Pop to Movies. With this knowledge, what can you say about the curvature of the
indifference curves?
8. If the MRS = 1 (x on the horizontal, y on the vertical) and PX = $0.50 while PY =
$1.50, should the individual increase or decrease his consumption of Y?
9. Sketch the substitution effect and income effect for an increase in the price of a
normal good?
10. Sketch the substitution effect and income effect for an increase in the price of an
inferior good?
11. Suppose that housing and fun are the only two commodities available in a society
without time.
a.
Draw the budget line and affordable set if Income = $3000 per month, Rent is
$500 per room, and Fun is $300 per unit.
Rooms
Units of Fun
b.
c.
d.
e.
Suppose that Bill chooses to rent a four bedroom apartment. How much Fun
has he chosen? Fun = _____________
Suppose that Donna chooses to rent a three bedroom apartment. How much
Fun has she chosen? Fun = _____________
Donna is clearly more fun than Bill. What is Donna’s MRS at her optimal
choice? MRS = _______
Bill is sensible. What is Bill’s MRS at his optimal choice? MRS =______
12. Housing and fun are the only two commodities available in a society without time.
The price for fun is $10. Budget lines are drawn for Dave and two of Dave’s
indifference curves are drawn.
a. What is Dave’s income? _____________________________
b. What is the price for housing in the lower budget line? ______________
c. What is the price for housing in the upper budget line? _______________
d. Indicate the substitution effect, income effect and total price effect on the
diagram.
e. Draw Dave’s demand for housing curve in the space provided.
Fun
200
8
16
Housing
P
Housing