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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: 1 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.) 2 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.) 3 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.) 4