1. Movie rentals
You like to rent movies to watch in the evening. If rentals become cheaper, you will rent more movies, but only up to a maximum of 7 per week – at which point you are watching a movie every evening. Draw a plausible budget line and indifference map, and use this graph, and an accompanying demand curve, to show the effect on movie rentals of lower and lower prices for renting movies.

2. Cobweb
Suppose that the supply curve for soybeans is given by Qs = P/3, and the demand for soybeans is given by Qd = 50–0.5P.
a. Graph these curves and find the equilibrium price and quantity.
b. Now suppose that farmers make decisions as follows.
They decide how much to plant based on this year’s price. The harvest then arrives, and the price adjusts so as to clear the market. Farmers then make their next planting decision, and so on. Suppose the price today is 90, as farmers are about to make their decisions about planting. Calculate the prices and output for the next four planting cycles, graphing the points and joining them with a line.
c. Is this “cobweb” model plausible? Explain.

3. Consumer surplus
There used to be a toll of 50 cents on both the inbound and outbound tunnels leading to Logan airport. They were replaced by a $1 on the inbound side and no toll on the outbound lane. Assume that vehicles cause almost no wear and tear to the tunnels as they pass through.
a. Show that if collection costs are trivial, it is preferable from a welfare point of view to collect the 50-cent tolls in both directions.
b. Suppose that the inbound lane is always congested. Explain why the removal of the toll would not lead to any benefit to consumers, and indeed would lead to greater social cost overall.

4. Bets
You have just won $100,000 a year for life in the state lottery. Use a diagram showing the tradeoff between leisure (on the horizontal axis) and goods (on the vertical axis) for the following:
a. Show how the lottery winnings affect your budget line.
b. After winning the lottery you continue to work the same amount of hours every day. What is the income effect of the lottery gain?
c. Now your employer increases your hourly wage. Using the income effect from b., as well as a reasonable substitution effect, explain whether you choose to work more hours per week.

1. Movie rentals You like to rent movies to watch in the evening....