Group Assignment 1 I. II. III. Answer all the questions Due on 12th March, 2014 in the class.

Late submission will be penalized by deducing marks

1. The table below shows how the number of books Katie buys each year depends on her income. Katie's income Katie's purchases (dollars per year) (books per year) 50,000 14 70,000 16 90,000 18 110,000 20 a) What kind of relationship exists between Katie's income and the number of books she purchases? Direct relationship b) Plot the relationship between Katie's income and the number of books she purchases. Measure income along the vertical axis and the number of books along the horizontal axis. c) What is the slope of the relationship between $50,000 and $70,000 of income? d) What is the slope of the relationship between $90,000 and $110,000 of income? e) Comment on the similarity or dissimilarity of your answers to parts (c) and (d). 2. What does the slope of the curved line at point A shown in the above figure equal?

3. The figure below represents the production possibilities frontier for a country.

a) The nation is currently producing at point B and wants to move to point C. What is the opportunity cost of the move? 1 (million) unit of automobile b) The nation is currently producing at point B and wants to move to point A. What is the opportunity cost of the move? 3 (million) units of cameras

4. Suppose a factory can be designed to produce either trucks or cars. The figure below shows the marginal cost and marginal benefit of producing trucks in terms of the forgone cars.

a) What is the marginal benefit of the 25th truck? 3 b) What is the marginal cost of the 25th truck? 25 c) Should the 25th truck be produced? Why or why not. Yes, because MB>MC d) What is the marginal benefit of the 75th truck? 1 e) What is the marginal cost of the 75th truck? 3 f) Should the 75th truck be produced? Why or why not? No, because MC>MB g) What is the allocatively efficient quantity of trucks? 50 units

5. The table below gives the demand and supply schedules for cat food. If the price is $3.00 per pound of cat food, will there be a shortage, a surplus, or is this price the equilibrium price? If there is a shortage, how much is the shortage? If there is a surplus, how much is the surplus? If $3.00 is the equilibrium price, what is the equilibrium quantity? There is a surplus of 9 units. Price Quantity Quantity (dollars per demanded supplied pound of cat (tons of cat (tons of cat food) food per year) food per year) 1.00 52 15 1.50 46 26 2.00 43 34 2.50 40 30 3.00 35 44

6. Using supply-and-demand diagrams, show and explain the effects of the following events on the price of CD-Rs and the quantity of CD-Rs sold. For each event, identify which of the determinants of demand or supply is affected, how it influences demand or supply, and what happens to the equilibrium price and quantity. a) The price of a CD burner falls. b) Workers who make CD-Rs get a pay raise. c) Producers introduce new cost-saving technologies in their CD-R production plants. d) Consumers' incomes increase and CD-Rs are a normal good. e) Free peer-to-peer music exchange through the Internet becomes legal. 7. A market research team has come up with the demand and supply schedules for gasoline in Motorville in the table below. Use these data to analyze the situation in the market for gas in Motorville. Price (cents per gallon) 290 300 310 320 330 340 350 Quantity demanded Quantity supplied (thousands of (thousands of gallons per week) gallons per week) 80 20 70 30 60 40 50 50 40 60 30 70 20 80

a) Draw a figure showing the demand curve for gasoline and the supply curve of gasoline. What are the equilibrium price and quantity? b) Suppose the price is $3.30. Describe the situation in the market and explain how the
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market adjusts. Now suppose the price is $3.00. Describe the situation in the market and explain how the market adjusts. c) The market research report also predicts that a rise in the price of crude oil will decrease the quantity of gas supplied by 20,000 gallons a week at each price. Suppose the price of crude oil does rise. Use your figure to show how this will affect the market for gas. How will the market adjust? What will be the new equilibrium price and quantity? 8. Suppose that business travelers and leisure travelers have the demand schedules for airline tickets from Atlanta to Philadelphia given in the table below. Quantity Quantity Price demanded demanded leisure (dollars per business travelers travelers ticket) (tickets per week) (tickets per week) 0 1,800 1,600 100 1,600 1,200 200 1,400 800 300 1,200 400 400 1,000 0 500 800 0 a) Draw both demand curves. b) As the price of tickets rises from $200 to $300, what is the price elasticity of business travelers' demand? What is the price elasticity of leisure travelers' demand? (Use the midpoint method in your calculations.) c) Why do business travelers and leisure travelers have different price elasticities of demand for airline tickets? d) At what price is the price elasticity of demand equal to 1 for business travelers? For leisure travelers? Explain. 9. The number of taxicabs in Motorville and the taxicab fares are regulated. The fare currently charged is $5 a ride. Motorville taxicab drivers want to obtain government's permission to raise the fare to increase their revenues and ask you to be their economic adviser. After studying the market, you come up with the following demand schedule for taxicab rides:

Price Quantity demanded (dollars per ride) (rides per month) 3 160 4 120 5 80 6 40 7 0 a) Calculate the price elasticity of demand for taxicab rides as the fare rises from $5 to
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$6. (Use the midpoint method in your calculations.) Is the demand price elastic or inelastic for this fare rise? Elasticity = 1, it is unit elastic b) What happens to the taxicab drivers' total revenue if the fare rises from $5 to $6? How can you use your answers in part a to answer this question? Should the drivers try to obtain permission to raise the fare? Total revenue will decline from 400 to 240, no it shouldnt. c) Calculate the price elasticity of demand for taxicab rides as the fare falls from $5 to $4. (Use the midpoint method in your calculations.) Is the demand price elastic or inelastic for this fare decrease? Elasticity = 1.8, it is elastic d) What happens to the taxicab drivers total revenue if the fare falls from $5 to $4? How can you use your answers in part c to answer this question? Should the drivers try to obtain permission to lower the fare? It will increase from 400 to 480, yes it should decrease the price. e) What fare will maximize the taxicab drivers total revenue? Explain. $3 and $4, because the price is subject to elastic demand. 10. When the price of bananas rises 2 percent, the quantity demanded of peanut butter falls 4 percent. a) What is the cross elasticity of demand between these two goods? E=2 b) How are these goods related? Substitutes c) If the price of bananas rises, how will that affect the demand curve for peanut butter? It will increase the demand, the curve will shift to the right. 11. The figure below shows the market for ink-jet printers.

a) What are the equilibrium price and equilibrium quantity of printers? Is this equilibrium efficient? Explain. Eq price = 100. Eq quantity = 80. Because it is the common point b) Calculate the total amount consumers paid for printers bought. c) Calculate the consumer surplus. d) Calculate the producer surplus. 12. The table below shows the demand for and supply of rental housing in Crainsboro. The city government is considering imposing a rent ceiling of $700 a month. Help the
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government to analyze the effects of the proposed rent ceiling. Rent Quantity Quantity supplied (dollars per demanded (units per month) month) (units per month) 500 1,200 0 600 1,000 100 700 800 200 800 600 300 900 400 400 1,000 200 500 1,100 0 600 a) Draw the demand and supply curves. With no rent ceiling, what is the rent and how many apartments are rented? b) With the rent ceiling, what is the rent and how many apartments are rented? What is the shortage of housing? Explain. c) If the rent ceiling is strictly enforced, what is the maximum price that someone is willing to pay for the last unit of housing available? Is the housing market efficient? Explain. d) If a black market develops, how high could the black market rent be?

13. The table above shows the demand for and supply of labor in a small less developed country. Quantity Quantity Wage rate demanded supplied (dollars per hour) (hours per (hours per month) month) 3 800 400 4 700 500 5 600 600 6 500 700 7 400 800 a) Draw the demand and supply curves. What are the equilibrium wage and the level of employment? b) Currently, the minimum wage is set at $4.50 per hour. How many hours are worked? How many hours of labor are unemployed? c) If the minimum wage is raised to $6 per hour, what are employment and unemployment?

14. The table below gives the demand and supply schedules for bottled spring water in Springsboro. Assume that the only people who benefit from spring water are the people who drink it and the only people who bear the cost of bottled spring water are the people who produce it.
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Price (cents per bottle) 40 80 120 160 200 240 280

Quantity Quantity demanded supplied (bottles per day) (bottles per day) 1,200 0 1,000 200 800 400 600 600 400 800 200 1,000 0 1,200

a) Draw the market demand and market supply curves. What are the equilibrium price and equilibrium quantity of spring water? Is this equilibrium efficient? Explain. b) What is the maximum price that consumers are willing to pay for the 400th bottle? What is the minimum price that producers are willing to accept for the 400th bottle? Explain. c) Are 400 bottles a day less than or greater than the efficient quantity? Explain your answer. d) If the market for spring water is efficient, what is the consumer surplus? Show it on your graph. What is the producer surplus? Show it on your graph. e) If spring water bottlers produce 400 bottles a day, is there a deadweight loss? If yes, what is it? Explain your answer using your graph.

15. The table below shows the demand and supply schedules for the market for coffee in Roastville. A tax on coffee of 75 cents per pound is proposed and the local government asks you to examine the effects of the tax. Price Quantity Quantity supplied (dollars per demanded (pounds per day) pound) (pounds per day) 1 480 0 2 360 0 3 240 240 4 120 480 5 0 720 a) Draw the demand and supply curves. If there is no tax on coffee, what is the price and how many pounds are sold? b) With the tax, what is the price that consumers pay? What is the price that sellers receive? How many pounds of coffee are sold? c) What is the government's total tax revenue? How much of the 75 per pound tax is paid by buyers? How much is paid by sellers? d) If there are no external costs and benefits, what is the efficient level of coffee production? e) If the tax is imposed, will the level of production be efficient? Why or why not?