Download Econ 1102: Principles of Macroeconomics

Name:________________________
Class Time: ______________
HW #3
“Principles of Microeconomics”
NSCC - Spring 2007
Professor: Moonsu Han
Total 25 points.
Question 1 Bring definitions for following terms. (Total 7 pts. 1 pt. each)
a. Price Elasticity of Demand:
b. Income Elasticity of Demand:
c. Cross Price Elasticity of Demand:
d. Excludability:
e. Rivalry:
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f. Present Value:
g. Autarky:
Question 2 Suppose that your demand schedule for DVDs is as follows. (Total 8 pts.)
Price
$8
$10
$12
$14
$16
Quantity Demanded (Income =
$10,000)
50
40
30
20
10
Quantity Demanded (Income =
$12,000)
60
45
34
26
14
a. Use the midpoint method to calculate your price elasticity of demand as the price
of DVD increase from $8 to $12 if (i) your income is $10,000 (2 Pts.), and (ii)
your income is $12,000. (2 Pts.)
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b. Calculate your income elasticity of demand as your income increases from
$10,000 to $12,000 if (i) the price is $12 (2 Pts.), and (ii) the price is $16. (2 Pts.)
Question 3 Suppose that Congress imposes a tariff on imported autos to protect the US
auto industry from foreign competition. Assuming that the US is a price taker in the
world auto market, draw a diagram and show on it: the loss to US consumers, the gain to
US producers, government revenue from tariff, and DWL. (4 Pts.) (Note: You may want
to label the area clearly.)
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Question 4 Sara has $100 to spend on DVDs and music CDs. Given the information in
the following table, is Sara maximizing utility? Explain details. (2 Pts.)
Product
DVD
CD
Price
$10
$5
Quantity
5
10
Total Utility
1,500
1,000
MU of last unit
100
50
Question 5 A company has an investment project that would cost $100,000 today and
yield a payoff of $200,000 in seven years. (4 Pts.)
a. Should the firm undertake the project if the interest rate is 15%, 10%, 5%?
(Note: Need to explain why undertake or why not and show details of
calculation.) (3 pts.)
b. Can you figure out the exact cutoff for the interest rate between profitability
and non-profitability? (1 Pts.)
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