1. Suppose that the market for automobiles has the following supply and demand schedules:
Price of car
a) Using this information, draw the demand curve and the supply curve for automobiles.
b) What is the equilibrium price and quantity for automobiles?
c) Assume the government levies a tax of $3000 per car. What is the price that consumers
will pay for a car now? Has the price that consumers pay risen by the full amount of the
tax? Explain why.
d) What is the price received by automakers? Illustrate the effect of this tax in your diagram
from part a.
e) Calculate the government revenue raised by this tax.
f) Is the market efficient, with the $3000 excise tax? Explain. Illustrate your answer with a
2. In each of the following cases, explain whether the incidence of the tax falls more heavily on
consumers or produces.
a) The government imposes a tax of $0.75 per bottle on bottled water. As a result, the
number of bottles sold decreases by 70,000. With the tax, consumers are paying $1.25 per
bottle, which is $0.25 more than they were paying without the tax.
b) The government imposes an excise tax the sale of all movie tickets sold. Before the tax
was imposed, theaters sold a total of 400,000 tickets per year at a price of $15 per ticket.
With the tax, moviegoers now pay $16.50 per ticket and the theaters receive $13.50 for
each ticket sold. Because of the tax, ticket sales drop to 300,000 tickets per year.
c) The government imposes an excise tax on the sale of boots. Before the tax, 600,000 pairs
of boots were sold each year at a price of $150. After the tax is imposed, 500,000 pairs of
boots are sold. Consumers pay $157 for a pair of boots now, and the producers receive
$144 from each pair sold.
3. Alexis has a job as a film editor where she makes $150,000 per year. She owns a building
that she rents for $70,000 per year. She is considering quitting her editing job and using the
building she owns to open an ice cream shop. Alexis calculates that she will make $250,000
per year selling ice cream. She will need to pay $20,000 for ingredients and equipment, along
with another $20,000 to hire extra help in the summer.
a) Alexis' accountant says that she will make a profit. Is the accountant correct? How much
profit does Alexis' account say she will make? Explain.
b) Should Alexis switch from film editing to the ice cream business? Explain.
4. You spent $50 to reserve a seat at a dinner that you believe will give you a benefit equal to
$100. The dinner reservation cannot be exchanged or refunded. After making the reservation,
your friend offers to sell you a ticket to the opening night of a film that you want to see. The
movie ticket will cost $20 and you know that seeing the film will give you a benefit equal to
$110. Should you go to the dinner or the film? Explain.
5. Three cake makers have very different ways of operating their businesses. The table below
shows the total cost for each of them, for making cakes.
Quantity of cakes
Ciara's total cost
Ryan's total cost
Linda's total cost
a) Calculate the marginal cost for each cake maker.
b) Draw the marginal cost curve for each.
c) Who has increasing marginal cost, who has decreasing marginal cost, and who has
constant marginal cost?
6. Raheem works as an Uber driver in his spare time. His total benefit and total cost depend on
the number of hours that he drives, as shown in the table below.
Quantity of hours worked
a) Use marginal analysis to determine Raheem's optimal number of hours worked. Explain.
b) Calculate the total profit Raheem will earn if he works the optimal number of hours.
7. Each week, Kadeem sets aside $12 to be used to buy either doughnuts or bagels.
a) If the price of a doughnut is $2, and the price a bagel is $4, list all the consumption
bundles that will use up Kadeem's budget.
b) Given the following information about Kadeem's utility from consuming doughnuts and
bagels, calculate his marginal utility and his marginal utility per dollar, and fill in the
Marginal Utility per Dollar
Marginal Utility per Dollar
8. Use your answers from question seven to answer the following questions.
a) Does Kadeem have diminishing marginal utility when consuming doughnuts? Does he
have diminishing marginal utility from consuming bagels? What does diminishing
marginal utility mean? Looking only at Kadeem's utility from consuming doughnuts,
what happens when Kadeem consumes a sixth doughnut? What does this mean?
b) Calculate the total utility that Kadeem will receive from each of the consumption bundles
in part a, from question seven.
c) Using marginal analysis, explain how Kadeem can maximize his utility from doughnuts
and bagels, with his budget of $12.
9. For each of the following situations, decide whether the consumption bundle that Angelika is
considering is optimal or not. If the bundle is not optimal, explain how Angelika could
change her spending on the two goods to increase her total utility.
a) Angelika has $120 to spend on tickets to hockey games and tickets to soccer matches.
The hockey tickets cost $40 a piece, and the soccer tickets cost $20 each. She is
considering going to see two hockey games and two soccer matches. She believes that the
second hockey game will give her the twice as much additional utility as the second
Angelika has $12 to spend on ice cream cones and cookies. The cookies cost $2 a piece,
and the ice cream cones cost $3 each. She is considering purchasing three cookies and
two ice cream cones. The last ice cream cone that she purchases gives her the same
amount of additional utility as the last cookie.
Angelika has $14 to spend on pencils and pens. The pencils cost $1 a piece, and the pens
cost $2 each. She is considering purchasing four pencils and four pens. She believes that
the fourth pen will give her twice as much additional satisfaction as the fourth pencil.
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