## Transcribed Text

PROBLEM 1 Supplemental File?
Four people, Annie, Bobby, Charlie and Dave, distribute their time between typing words and solving math problems. Their rates of typing and solving are given in
the table below. Complete the green section in such a way that the production possibilities frontier is pushed out as far as it can be. Also answer the question below.
Student Typing Math
Annie 40 10
Bobby 50 30
Charlie 60 20
Dave 40 30
Max 190 90
Typing Math
If all four people type…
If three type, 1 does math…
If two type, 2 do math…
If one types, 3 do math…
if all four people do math…
QUESTION:
Who has the highest opportunity cost for typing words?
What is the opportunity cost for this person of typing one word?
0
0.2
0.4
0.6
0.8
1
1.2
0 0.2 0.4 0.6 0.8 1 1.2
PPF
PPF
PROBLEM 2 Supplemental file?
Gary and Diane must prepare a presentation for their marketing class. As part
of their presentation, they must do a series of calculations and prepare 50
PowerPoint slides. It would take Gary 10 hours to do the required calculation
and 10 hours to prepare the slides. It would take Diane 12 hours to do the
calculations and 20 hours to prepare the slides.
How much time would it take the two to complete the project if they divide the calculations equally and the slides equally?
How much time would it take the two to complete the project if they use comparative advantage and specialize in calculating or preparing slides?
If they specialized using comparative advantage, how much of each task would each person complete?
Gary:
Diane:
PROBLEM 3 Supplemental file?
There are three consumers in a market for apples. Their demand curves are given below.
1. What is the market demand at each price?
Price Edward Francine Gregory Market Demand
$ 5.00 0 0 1
$ 4.00 1 0 2
$ 3.00 2 0 3
$ 2.00 3 1 4
$ 1.00 4 3 5
He can purchase five units for $1 each.
He can purchase up to another three units for $2 each.
He can purchase up to another two units for $3 each.
He can purchase another unit for $4.
How much should the entrepreneur purchase if the market price is…
Q?
$1
$2
$3
$4
3. What is the equilibrium price in this market? Equilibrium quantity?
Price Henry's Qd
$ 5.00 3
$ 4.00 4
$ 3.00 5
$ 2.00 6
$ 1.00 7
Quantity Demanded
2. An entrepreneur has the opportunity to purchase this good from
wholesalers and deliver it to market and sell it to the three consumers noted
above.
4. Suppose that Henry is also in the market and his demand curve is as given below. How does this
change the equilibrium price and quantity?
$-
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
0 0 0 1 1 1 1
Market Demand
Supply
PROBLEM 4 Supplemental file?
GRAPH #:
a. Winter starts and the weather turns sharply colder.
b. The price of tea, a substitute for hot chocolate, falls.
c. The price of cocoa beans decreases.
d. The price of whipped cream falls.
e. A better method of harvesting cocoa beans is introduced.
f. The Surgeon General of the U.S. announces that hot chocolate cures acne.
g. Protesting farmers dump millions of gallons of milk, causing the price of milk to rise.
h. Consumer income falls because of a recession and hot chocolate is considered a normal good.
i. Producers expect the price of hot chocolate to increase next month.
Suppose we are analyzing the market for hot chocolate. Examine the graphs below and identify which graph
belongs with each market shock. You may or may not use a graph more than once.
#1
#2
#3
#4
PROBLEM 5 Supplemental file?
Consider the Demand Curve given in the demand schedule below.
Quantity Price
1 8
2 7 "A"
3 6 "B"
4 5
5 4
6 3
7 2
8 1
1. Using the midpoint method, calculate the Price Elasticity of Demand between A and B.
Show your work (or keep the formulas in your cells).
Consider the two supply curves given in the table below and in Figure 2.
Quantity Supply1 Supply2 Demand
1 4 1 13
2 5 3 11
3 6 5 9
4 7 7 "C" 7
5 8 9 "D" 5
6 9 11 3
7 10 13 1
2. Calculate the Price Elasticity of Supply between C and D for both Supply Curve 1 and Supply Curve 2.
Supply Curve 1:
Supply Curve 2:
3. In Figure 2, suppose the government enforced a price ceiling at $5.00. Which market would see larger shortages, the market with Supply1 or Supply2?
How many units would the shortages be in each market?
Supply curve 1:
Supply Curve 2:
4. Consider Figure 2. Which curve is most likely to be the longer-run supply curve and which is most likely to be the shorter-run supply curve?
Supply curve 1:
Supply Curve 2:
5. What does this tell you about the distortions created by price ceilings in the short versus long run?
0
1
2
3
4
5
6
7
8
9
0 2 4 6 8 10
Figure 1
Demand
0
2
4
6
8
10
12
14
0 2 4 6 8
Figure 2
Supply1
Supply2
Demand
PROBLEM 6 Supplemental file?
Quantity Supply Demand
0 4 13
1 5 11
2 6 9
3 7 7
4 8 5
5 9 3
6 10 1
1. In Figure 2, suppose the government enforced a price floor at $9.00. Would there be a surplus or a shortage or neither?
2. How many units (if any) will the shortage or surplus be?
Reservation Prices
Consider the supply and demand curves given in the
table below and in Figure 2.
0
2
4
6
8
10
12
14
0 1 2 3 4 5 6 7
Figure 2
Supply
Demand
PROBLEM 7 Supplemental file?
Table 1 represents your basic supply and demand schedule in the market for low-skilled labor.
Demand (Qd) represents the number of workers firms want to hire; Supply (Qs) is the number of
workers willing to work at each wage.
The chart to the right of table 1 provides a graphical interpretation of this situation.
Qd (# jobs
in 000s)
Qs (#
workers in
000s) Wage
Wage +
Worker
Tax diff
800 100 $7.00
790 125 $7.10
1: How many workers are employed in Equilbrium? 780 150 $7.20
770 175 $7.30
760 200 $7.40
2: What is the equilibrium wage? 750 225 $7.50
740 250 $7.60
730 275 $7.70
720 300 $7.80
3: Suppose there is a $1.40 tax placed on workers. 710 325 $7.90
Reflect this tax in the shaded column in the table. 700 350 $8.00
690 375 $8.10
4: How much do employers have to pay workers in this new equilibrium? 680 400 $8.20
670 425 $8.30
How much do the workers get to keep? 660 450 $8.40
650 475 $8.50
What is the new equilibrium quantity of employment? 640 500 $8.60
630 525 $8.70
620 550 $8.80
610 575 $8.90
600 600 $9.00
590 625 $9.10
580 650 $9.20
570 675 $9.30
560 700 $9.40
550 725 $9.50
540 750 $9.60
530 775 $9.70
520 800 $9.80
510 825 $9.90
500 850 $10.00
490 875 $10.10
480 900 $10.20
470 925 $10.30
460 950 $10.40
450 975 $10.50
440 1000 $10.60
430 1025 $10.70
420 1050 $10.80
410 1075 $10.90
400 1100 $11.00
Table 1
$6.00
$6.50
$7.00
$7.50
$8.00
$8.50
$9.00
$9.50
$10.00
$10.50
$11.00
0 200 400 600 800 1000 1200
Labor Supply
Labor Demand
LS + Tax
PROBLEM 8 Supplemental file?
Using the graph shown, determine the value of each of the following:
a. equilibrium price before the tax
b. consumer surplus before the tax
c. producer surplus before the tax
d. total surplus before the tax
e. consumer surplus after the tax
f. producer surplus after the tax
g. total tax revenue to the government
h. total surplus (consumer surplus + producer surplus + tax revenue) after the tax
i. deadweight loss
PROBLEM 9 Supplemental file?
Consider a consumer who has
an income of $200 and faces prices
for good X of $50 and for good Y of
$20. Click and drag the red line in
the graph at right to where it should
be to correctly represent her budget
constraint. When you click on the
line, you'll be able to drag the ends
of the line to the appropriate X and Y
intercepts.
Then answer the following questions:
1. Could the bundle (3X, 1Y) be an optimum?
2. If not, why not?
3. Could the bundle (8X, 0Y) be an optimum?
4. If not, why not?
5. Could the bundle (3X, 5Y) be an optimum?
6. If not, why not?
PROBLEM 10 Supplemental file?
The diagram at right represents a market
for a product that generates pollution when
it is consumed. Please answer the questions
below:
1. What will be the equilibrium price and quantity
if there is no regulation in this market?
Price =
Quantity =
2. What is the socially optimal level of output?
Quantity:
3. How much pollution cost is imposed on
society at the market equilibrium level of output?
Pollution Cost:
4. How much pollution cost is imposed on
society at the socially optimal level of output?
Pollution Cost:
5. What is the net amount of surplus that exists
in this market at the socially optimal level of output?
Total Surplus:
PROBLEM 11 Supplemental file?
Consider the town of Springfield with its three residents, Sophia, Amber and Cedric.
The three residents are trying to decide how large, in acres, they should build a public
park. The table below shows each resident's marginal valuation of each acre of park space.
Total Acres Sophia Amber Cedric
1 10 24 6
2 8 18 5
3 6 14 4
4 3 8 3
5 1 6 2
6 0 4 1
7 0 2 0
1. Suppose the cost to build the park is $14 per acre. How large should the park be
in order to maximize total surplus from the park in Springfield?
2. How much would it cost to build a park that size?
3. If the residents decided to build a park that size and each person paid 1/3 of the cost,
how much surplus would each resident receive after paying their share?
Sophia:
Amber:
Cedric:
PROBLEM 12 Supplemental file?
1. Complete the green boxes in the following table. Use Excel formulas where appropriate.
You should see two lines pop up in Chart 2 as you complete your graph.
2. Complete the questions below the table.
Number of
Workers (L) Total Output (Q)
Marginal
Product of
Labor
Average
Product of
Labor
0 0 XXX XXX
1 4
2 10
3 18
4 28
5 40
6 48
7 54
8 58
1. At what level of inputs does the Law of Diminishing Marginal Product kick in?
2. At what point will the average product curve begin to fall?
PROBLEM 13 Supplemental file?
The table below represents a firm that has some market power.
The firm uses two inputs, capital and labor.
Capital is fixed at one unit at a cost of $500 in the short run.
Workers cost $250 each.
The firm's short run production function is given in columns B and C.
The demand curve facing the firm is given by the quantities in column C and the prices in column M.
Complete the table and answer the questions below.
Capital = $500
wage = $250
Number
of
Workers
(L) Total Output (Q)
Marginal
Product of
Labor
Average
Product of
Labor
Total
Fixed Cost
Total
Variable
Cost Total Cost
Average
Fixed Cost
Average
Variable
Cost
Average
Total Cost
Marginal
Cost Price
Total
Revenue
Marginal
Revenue
Average
Revenue Profit
0 0 XXX XXX 0 XXX XXX XXX XXX XXX 0 XXX XXX
1 10 37
2 25 34
3 45 31
4 70 28
5 100 25
6 125 22
7 145 19
8 160 16
9 170 13
10 175 10
1. At what level of output do we reach the bottom of the average total cost curve?
2. At what level of output does the marginal cost curve cross the average variable cost curve?
3. What is the firm's short run supply curve?
Quantity Price
4. At what level of inputs does the law of diminishing marginal product kick in?
5. At what level of output does marginal cost equal marginal revenue?
6. Are profits maximized at the level of output you identified in Question 5?
7. What price will the firm charge if it is profit-maximizing?
PROBLEM 14 Supplemental file?
Consider the diagram of a perfectly competitive
firm at the right. If all firms are identical in this
industry and if costs do not change as firms enter
and exit the market, please answer the questions
below.
1. What is the long run equilibrium price in this market?
2. What is the long run equilibrium firm size in this market?
3. If there are 50 firms in the industry, how much will industry output be?
4. Suppose that in the short run, the market price is $4. What is the short run equilibrium firm size?
5. Will this lead to entry or exit in this market?
6. Suppose that the short run market price is $8. What is the short run equilibrium firm size?
7. Will this lead to entry or exit in this market?
8. Suppose that market price is $6 and total industry output is 168 units. How many firms are in existence in the short run?
PROBLEM 15 Supplemental file?
1. Does either player have a dominant strategy? If so, what is it/are they?
2. Does this game have any Nash equilibria? How many (there may be more than one)? What is it/are they?
3. What do you predict the outcome of this game will be?
Consider the following simultaneous, non-cooperative
game, where two competing firms, Column and Row,
are trying to decide whether to slash prices or
maintain them at their current level. Profits to each
firm under each outcome are given below.

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