Questions & Answers

QUESTION 5

2) Suppose we have the market for frozen pizzas. Below is the supply and demand schedule. a) Draw supply and demand curve and mark Equilibrium price and Quantity. b) Suppose the government instituted a price ceiling of \$9 per pizza. Show this situation in the graph. c) Show area of deadweight loss caused the price control on your graph.

1) Suppose we have an agrarian economy that can utilize all its resources to produce either computer chips or wheat. Below is a table of possible combinations of both goods that can be produced if they are using their resources efficiently. a) Draw this country's PPF with computers on X-Axis b) Label the parts of the graph that are "Unattainable", "Efficient", and Inefficient". c) What is the opportunity cost for this country to go from producing combination E to producing combination D? What about from B to A.

1. Hessah spends a total of a 100 KD each month on two desserts: chocolate chip cookies and vanilla ice cream. Let C and Pc denote the quantity and price of chocolate chip cookies she consumes, respectively. Let V and Py denote the quantity and price of vanilla ice cream cups she consumes, respectively. The table below shows Hessah's optimal baskets as the price of vanilla ice cream changes. a. Sketch Hessha's price-consumption curve for vanilla ice cream on any of the attached graph papers. Label her optimal baskets. Place the quantity of vanilla ice cream cups on the horizontal axis and the quantity of chocolate chip cookies on the vertical axis. b. Sketch Hessha's demand curve for vanilla ice cream on any of the attached graph papers. C. Sketch the Engel curve for vanilla ice cream on any of the attached graph papers. d. Comment on whether vanilla ice cream is a normal or an inferior good. Explain your answer. e. Sketch the Engel curve for cookies on any of the attached graph papers. f. Comment on whether cookies are normal or inferior goods. Explain your answer.

2. In this exercise, we'll practice how to derive individual and market demand curves from utility functions and consumers' preferences: Assume that consumers in an economy can be divided into two groups: high-income consumers and low-income consumers. These consumers only consume two goods: x and y. The utility functions of the high-income and low- income groups are given as follows, respectively: a. Derive the demand function of good x for high-income consumers (Hint: Find the optimal xH function in terms of other constants like Px, Py, and I). b. Perform the natural log monotonic transformation on the utility function for low-income consumers to make this problem simpler (Hint: Take the natural log function of U (x, y), and apply the natural log properties on the exponents of the function). c. Derive the demand function of good x for low-income consumers (Hint: Use the function in part (b) to find the optimal x,function in terms of other constants like Px, Py, and I₁. Using the function in (b) is just easier, but you are not obligated to use it). Now assume in the remaining parts that the monthly income of low-income consumers is \$300, and the monthly income of high-income consumers is \$6000. d. Write down the demand functions of good x for low-income consumers and high-income consumers at the given incomes. e. At what range of prices do high-income consumers stop buying product x? At what range of prices do low- income consumers stop buying product x? f. Write down the market demand equation for good x. g. At what price would you expect to see a kink in the market demand curve for good x? Explain your answer.

1. With which worker do you first experience diminishing returns to labor? 2. What is the profit maximizing level of output (How many lawns will you cut)? 3. How much profit will you make at the best output level? 4. Using the marginal cost column: At what price for lawn service would the entrepreneur be willing to hire the 11th and 12th workers and expand production to 240 customers?

b) If the total production matrix was not what you found above, but instead was given by:

3 . The graph below represents the gasoline industry. Answer the next questions using this graph. 4.1. Does the industry create a negative or positive externality? Briefly explain. 4.2. Without any government intervention, what are the equilibrium price and quantity? 4.3. What are the socially optimal price and quantity? 4.4. What is the size of the external cost in this market? 4.5. Give an example of a policy that would internalize this external cost in this industry. Briefly explain.

1. The graph below shows the market for the MTA one-way tickets during off-peak hours. 2.1. The authorities concerned with the wellbeing of the passengers cap the price per ticket to \$8. What is the effect of this policy on the market for MTA one-way off-peak tickets? Briefly explain. A. 2.2. The MTA administration (worried that its revenues won't cover its operating cost) successfully lobby the authorities to institute a price floor of SS. What is the effect of this policy? Briefly explain.

2. Steven buys an iPhone for \$550 and gets a consumer surplus of \$80. 3.1. What is Steven's willingness to pay? Show your calculations. 3.2. What is seller's willingness to sell if the costs of production per iPhone are \$385? Show your calculations. 3.3. If Steven had bought the iPhone on sale for \$490, what would his consumer surplus have been? Show your calculations. 3.4. If the price of an iPhone were \$800, what would Steven's consumer surplus have been? Show your calculations.