Download Problem Set 1

Department of Economics, CSUS
Economics 1B
Fall 2002
Name:_____________________
Section Number:_____________
Problem Set 1 Solutions
Due Tuesday September 17 at the beginning of lecture
Write all answers neatly on the pages given. Draw all graphs and write your answers in the space provided. Show all
of your work. You may discuss questions you have with other students, but your answers need to be in your own
words. Answers that appear to be copied from another student will receive a grade of zero.
1.
The United States produces both private (business sector) and public (government sector) goods. Draw a PPC
that represents the tradeoff between private goods and public goods. Label a point on the PPC that approximates
the division of production between private and public sectors in the United States.
Private Goods
P1 a.
P2
b.
a.
Public Goods
Show what would happen to the PPC if the government decided to increase taxes and increase spending by the
amount of the increase in taxes. Explain.
If the government increases taxes and spending simultaneously, the economy will produce more public goods
(government provided goods), and fewer public goods (free enterprise goods). This is a movement along the PPC,
toward the public goods axis.
b.
Show what would happen to the PPC if technology improved in a way that increased the production in both
public and private sectors. Explain.
If technology improved, the PPC would shift out since the production of society could increase in both the public and
private sectors.
2.
If the supply curve for a dozen roses is P = 1 + 0.1Q s, and the demand curve is P = 20 - 0.4Qd, what are
equilibrium price and quantity for a dozen roses? Show your work and show your results on a supply and
demand diagram.
1 + .1Q = 20 - .4Q
P
.5Q = 19
S
Q* = 38
P* = 1 + .1 ( 38)
P* = 1 + 3.8
4.8
P* = 4.8
D
38
Roses
Q
Department of Economics, CSUS
Economics 1B
Fall 2002
Name:_____________________
Section Number:_____________
3.
For each of the following, illustrate the impact of the event on a supply and demand diagram. You will shift
either the supply curve or the demand curve for each part of the question. Label your graphs carefully.
a.
Television Market: The advent of HDTV, or high definition television, makes traditional televisions less
desirable. What happens to the price of traditional televisions? The quantity of traditional TV’s sold? Explain.
P
The introduction of a substitute good causes a decrease in
demand for traditional TVs, price and quantity both decrease.
S
D2
D
Q
Traditional Televisions
b.
Milk Market: The recent fall in the prices of breakfast cereals has led to increased consumption of cereal.
What effect would this have on consumption and price of milk? Explain.
P
The decrease in price of a complimentary good causes an
increase in demand for milk, price rises, quantity rises.
S
D2
D
Milk Market
Q
Department of Economics, CSUS
Economics 1B
Fall 2002
c.
Name:_____________________
Section Number:_____________
New Cars: American incomes rose during the 1990s. What effect would this increase in income have on the
market for new cars? Explain.
P
The increase in income causes an
increase in demand for new cars, price rises, quantity rises.
S
D2
D
New Cars
Q