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ECONOMICS REVIEW PART 2 SOLUTION 1. The demand and supply schedule for submarine sandwiches at FHCI appears below: PRICE 2.50 2.25 2.00 1.75 1.50 1.25 1.00 2. QUANTITY DEMANDED 300 350 400 450 500 550 600 QUANTITY SUPPLIED 1000 900 800 700 600 500 400 a) What is the equilibrium price of gum? $1.30 b) What is the equilibrium quantity of gum? 525 What would happen to the equilibrium price and quantity of submarines in each of the following situations? a) The FHCI population drops by 400 students. Equilibrium Price Down Equilibrium Quantity Down b) The cost of the meat in the submarines rises in price. Equilibrium Price Up Equilibrium Quantity Down Economics Review Part 2 3. Page 2 of 9 c) The wages of ladies working the cafeteria increase by 10%. Equilibrium Price Up Equilibrium Quantity Down d) The price of submarine buns drops. Equilibrium Price Down Equilibrium Quantity Up e) Students are required to donate $2 per week to Torch. Equilibrium Price Down Equilibrium Quantity Down f) Tacos, which are cheaper than submarines, are introduced as an everyday item. Equilibrium Price Down Equilibrium Quantity Down Assume that normal supply and demand curves can represent the American market for beef. As a result of each event below, indicate in which direction the supply and demand curves will move (right, left, or no change) and what happens to equilibrium price and quantity. Event A. The price of cattle feed rises. B. People start worrying about the sanitation in meat slaughtering houses. C. A severe winter destroys 5% of the herds. D. The ban on the use of DES (a growth hormone used for cattle) is lifted. E. In an effort to aid farmers, government grants a subsidy of $.05 a pound for beef produced. F. Government grants farmers a subsidy of $10 per acre of land they own. G. All foreign beef is excluded from the American market. H. Per capita income rises. I. Housewives expect rising beef prices. SUPPLY DEMAND Q P LEFT NC DOWN UP NC LEFT DOWN DOWN LEFT NC DOWN UP RIGHT NC UP DOWN RIGHT NC UP DOWN RIGHT NC UP DOWN LEFT NC DOWN UP NC RIGHT UP UP NC RIGHT UP UP Economics Review Part 2 J. Food companies improve the taste of their soybean meat substitutes. K. The price of ham falls. L. A cheap and perfect substitute for leather is developed. M. The price of milk decreases and dairy farmers sell their herds. N. The price of ketchup (a complementary good) rises. O. The government establishes a price ceiling above equilibrium price. P. The government establishes a price ceiling below equilibrium price. Q. The government sets a price floor above equilibrium price. 4. Page 3 of 9 NC LEFT DOWN DOWN NC LEFT DOWN DOWN NC NC NC NC NC NC NC NC NC LEFT DOWN DOWN NC NC NC NC NC NC NC NC NC NC NC CN Suppose an ecologist is studying the population of the golden-throated song sparrow and he finds the relationships illustrated in the graph below between the hatch and death rates and population, given that existing food supply, level of predation, etc., are fixed. a) What will happen if the population is at level a? More will die than be born and population will decrease. At level b? Population will remain constant. At level c? More will be born than die and the population will increase. a) Show on the graph what will happen if the food supply increases. Death Rate curve will shift to the left, increasing the population. b) Explain what will happen on the graph if, due to an increase in the use of pesticides, fewer eggs hatch. Hatch rate curve will shift to the left, decreasing the population. Economics Review Part 2 c) 5. Explain what will happen on the graph if the number of predators increases. Death rate curve will shift to the right and perhaps, the hatch rate curve will shift to the left, decreasing the population. The Preservation Embalming Company’s cost data have been partially entered in the table below. Following the sudden and unexpected death of the company’s accountant, you are called to fill in the missing entries. Bodies Embalmed 0 1 2 3 4 5 6 6. Page 4 of 9 Total Cost 24 54 74 108 163 220 282 Fixed Cost 24 24 24 24 24 24 24 Variable Cost 0 30 50 84 139 196 258 ATC AVC AFC MC -54 37 36 40.75 44 47 -30 25 28 34.75 39.2 43 -24 12 8 6 4.8 4 30 20 34 55 57 62 You are given the following information about Rubber Duckies, Inc., a firm which manufactures rubber boats: Labour Workers Hired Per Week 1 2 3 4 5 6 7 8 9 10 Output Rubber Boats Per Week 1 2 5 7 11 14 16 17 18 18 Economics Review Part 2 a) Calculate marginal product and average product. LABOUR 1 2 3 4 5 6 7 8 9 10 7. Page 5 of 9 MARGINAL PRODUCT 1 1 3 2 4 3 2 1 1 0 AVERAGE PRODUCT 1 1 1.67 1.75 2.2 2.33 2.28 2.125 2 1.8 b) What is the relationship between average product and marginal product at output rates below 16 boats per week? Why? Maringal Product is above Average Product in this range. This is so because in this range Average Product is steadily increasing. What is the relationship between average product and marginal product at output rates above 16 boats per week? Why? Maringal Product is below Average Product in this range. This is so because in this range Average Product is steadily decreasing. a) b) Copy and complete the following table. Create a graph showing the demand (average revenue) and marginal revenue curves. Economics Review Part 2 Page 6 of 9 c) Explain the relationship between the curves. The marginal revenue curve always lies below the average revenue curve and when marginal revenue is less than average revenue then average revenue is on a downward slope. This explains the slope of the average revenue curve. d) Plot and draw the marginal cost and average cost, revenue, and profit rectangles. Economics Review Part 2 e) Page 7 of 9 Finally, indicate the profit-maximizing level of output. Quantity of 5..5 f) Price of $68.00 Confirm the profit-maximizing level of output using the table. Profit Maximization Table for Differentiated Portraits Price (P) ($ per package) Quantity (Q) (packages) Total Revenue (TR) Marginal Revenue (MR) Average Revenue (AR) Total Cost (TC) Marginal Cost (MC) Average Cost (AC) Total Profit (TR-TC) 90 85 80 75 70 65 60 55 1 2 3 4 5 6 7 8 90 170 240 300 350 390 420 440 90 80 70 60 50 40 30 20 90 85 80 75 70 65 60 55 70 100 120 140 175 230 345 540 70 30 20 20 35 55 115 195 70 50 40 35 35 38.33 49.28 67.5 +20 +70 +120 +160 +175 +160 +75 -100 Economics Review Part 2 8. Page 8 of 9 Place the following income and expenditure figures for Canada in the appropriate columns of the table below and calculate the totals. All figures are in billions of dollars. (8 marks) Wage and Salaries Consumer Spending Corporate Profits Interest and Rent Exports Indirect Taxes Government Expenditure Imports Incomes, Self-employed Gross Investment Depreciation Subsidies $685 $805 $126 $ 75 $109 $118 $277 $ 14 $ 94 $211 $110 $ 14 GDP, INCOME-BASED ITEM AMOUNT Wages and Salaries $685 Corporate Profits 126 Interest and Rent 75 Indirect Taxes 118 Incomes, Self-employed 94 Depreciation 110 Subsidies -14 Statistical Discrepancy TOTAL 9. GDP, EXPENDITURE-BASED ITEM AMOUNT Consumer Spending $805 Exports 109 Government Expenditure 277 Imports -14 Gross Investment 211 +97 Statistical Discrepancy 1291 -97 TOTAL 1291 Using 1988 as your base year, complete the table below (10 marks). YEAR NOMINAL GDP (BILLIONS) 1988 1989 1990 1991 1992 1993 $525.85 $545.36 $561.45 $569.84 $604.66 $610.15 INFLATION RATE FROM BASE YEAR REAL GDP IN 1988 DOLLARS 3.6% 6.8% 9.4% 14.3% 17.7% $525.85 $526.41 $525.70 $520.88 $529.01 $518.39 INFLATION RATE FROM PREVIOUS YEAR 3.6% 3.09% 2.43% 4.48% 2.97% Economics Review Part 2 10. Page 9 of 9 You are given the following table for an economy which sells 5 items. ITEM A B C D E a) 1993 1994 1995 QUANTITY PRICE/UNIT QUANTITY PRICE/UNIT QUANTITY PRICE/UNIT 27 28 67 25 22 3.20 189.00 75.00 600.00 399.00 25 31 65 27 19 3.25 200.00 78.00 600.00 400.00 31 42 79 47 25 3.50 200.00 81.00 605.00 395.00 Compute the GDP for each of the three years. 1993: $34181.40 1994: $35151.25 1995: $53217.50 b) With 1994 as the base year, compute the real CPI for 1993 and 1995. 1993 CPI: $34713.75 1995 CPI: $52862.75 c) If a person earns $50 000 in 1994, what would this person wage have to be in 1995 to keep up with inflation? NEW WAGE: $50335.54 d) If the wage did keep up with inflation from 1993 to 1994, what was the 1993 wage? 1993 WAGE: $49233.23 11. You are given the following inflation rate for the years 1994 to 1998. If 1995 is the base year, what is the CPI for each of the years. YEAR INFLATION RATE 1993 1994 1995 1996 1997 1998 0.0 3.4 4.7 3.8 4.2 5.1 What was the inflation rate from 1993 to 1998? 23.06% CONSUMER PRICE INDEX 100 103.4 108.2598 112.3736 117.09 123.06