# Project #45711 - Intermediate MicroEconomics

1.                  Basic Economic Concepts

a.       Briefly summarize the current events article about the day care industry posted on Bb.  Use a market model to illustrate what has been happening. (4 pts)

b.      In 1985 the price of a dozen donuts was \$2.00.  By 1990, the price of a dozen donuts was \$2.85.  If the CPI in 1985 was 125, calculate the CPI in 1990?  (3 pts)

2.                  Understanding Supply & Demand

a.       Suppose that although the quantity of gym memberships has increased greatly in the last year, the average price of a monthly membership has fallen.  Use a supply and demand diagram to show what is happening in this market.  What might be a specific reason for the change you identified? (3 pts)

b.      The quality of stereo components has increased dramatically in recent years while the absolute price has stayed the same.  Explain (with a market model) what must have been happening in recent years in the market for CD players? (3 pts)

3.                  Understanding Elasticities

a.       Due to the recession, housing prices have fallen 15%.  If the price elasticity of demand (absolute value) is 0.80, by how much will the quantity demanded change?  (2 points)

b.      You are given the following information:  P = \$10 and Q = 100,000 units per year.  Additionally, the price elasticity of demand = 2.0 and the income elasticity of demand is 0.50.  If income increases by 10% and the price falls by 10 percent, what will be the new quantity (Q)?  (2 points)

c.       At Kraft (where they produce salad dressing), when the price of lettuce went down from \$1.00 to \$0.90, the quantity sold of salad dressing went from 375,000 to 450,000.  Calculate the cross-price elasticity and report if these goods are substitutes or complements.  (2 points)

d.      Suppose that the government is considering putting an excise tax on the production of wristwatches.  If the elasticity of demand has fallen due to I-pods and cellphones to Ed = 0.75 but the elasticity of supply is 4.50, what percentage of the tax will be paid by consumers and what percent will be paid by the firms?  Use a market model to show the two relative elasticities and the relative tax burden.  (You do not need actual intercepts or prices for this problem.) (4 pts)

4.         Understanding Positive vs. Normative Economics

a.         For each of the following statements identify if it is a normative (N) or positive (P)? (1 pt each)

i.      During a recession, people tend to buy fewer refrigerators.  _____

ii.      If the recession continues, the government should extend unemployment benefits.  _____

iii.      Making health care coverage mandatory is the right thing to do.  _____

iv.      Because health care coverage is now mandatory, demand for insurance will increase and the price of insurance will increase for everyone. _____

v.      When the government buys more wheat, it causes the price of bread to increase and this places a greater burden (percentage-wise) on lower income households.  _____

5.         Accounting vs.  Economic Profit

a.       Suppose that Roberto has been running the only movie theatre in town, but he is now questioning whether this is going to continue to be profitable.  Last year his total revenues were \$150,000 and his total explicit costs were \$80,000.  Additionally, he has \$75,000 of his own money invested in the business which could’ve earned him 6% if invested in government bonds.  If Roberto shuts down his business, he could rent out the theatre to a local church for \$25,000 per year and he could save \$10,000 in taxes by volunteering the space during the week to a local food bank.  Additionally, he could find work as an electrician earning \$35,000 per year.  Calculate the accounting and economic profit of Roberto’s business and determine what Roberto should do.  (5 pts)

PROBLEMS:  Make sure to answer all parts of each question in order to get full credit.

6.   Suppose the supply and demand for bottles of water in the U.S. can be described by the following demand and supply schedules:

 Price Quantity Supplied (Qs) Quantity Demanded (Qd) 0 0 600 0.25 100 500 0.50 200 400 0.75 300 300 1.00 400 200 1.25 500 100 1.50 600 0

a.       Plot both the supply and demand curves and identify the market equilibrium in this market (price and quantity). [2 pts]

b.      Calculate consumer surplus, producer and total surplus. [3 pts]

c.       Now suppose that the government wants to reduce the amount of plastic bottles being used and imposes a \$0.50 excise tax on the production of bottled water.  Show this effect on your market model above and identify the new equilibrium price and quantity of bottled water. [3 pts]

d.      How much of the tax will be paid by the consumers?  How much will be paid by the consumers?  Identify these areas on your model above.  [4 pts]

e.       What is the new consumer, producer and total surplus?  [3 pts]

f.       What is the amount of the deadweight loss that will occur due to the tax?  [2 pts]

7.   Suppose the domestic demand and supply for a bottle of champagne can be described as:

Qd = 1500 – 33 P

Qs = 500 + 33 P

a.         Solve for the original market equilibrium (price and quantity) and show this on a market model. [3 pts]

b.         Calculate the original consumer, producer and total surplus.  [3 pts]

c.         Suppose that the world price is \$20.  Show this on your model above.  If there is free trade, calculate the quantities that American consumers will buy and American firms will provide.  Will the US be importing or exporting champagne?  How much?  Calculate the imports/exports.  [5 pts]

d.         How much did American consumers gain/lose due to free trade? Calculate the change in consumer surplus and be sure to specify if this is a gain or loss.  [2 pts]

e.         How much did American firms gain/lose due to free trade?  Calculate the change in producer surplus and be sure to specify if this is a gain or loss.  [2 pts]

8.         Assume that two nations have production possibilities for goods X and Y that can be described by the following equations:

Y1 = -4X1 + 400 and Y2 = -6X + 420

a.                   Graph the two PPFs on a model below.  Put good X on the horizontal axis.  Carefully identify all intercepts. [4 pts]

b.                  Who has the absolute advantage in the production of good X? [1 pt]  ________________

c.                   Who has the absolute advantage in the production of good Y? [1 pt]  ________________

d.                  Complete the following opportunity cost matrix:  [4 pts]

 Good X Good Y Country 1 1P = 1 S = Country 2 1P = 1 S =

e.                   Who has the comparative advantage in good X? [1 pt] ____________________

f.                   Who has the comparative advantage in good Y? [1 pt] ____________________

g.                  On your graph on the previous page, identify the joint PPF.  [2 pts]

8.         Suppose that the demand curve for corn is downward-sloping and very inelastic but that the supply curve is perfectly inelastic at a quantity of Q0 once the corn has been harvested.  Furthermore, assume that the equilibrium price is \$5 per bushel.  If the US government decides to enter the market for corn and purchase enough so that the price of corn doubles to \$10 per bushel, identify on a market model the amount spent on corn by private American consumers and the amount spent on corn by the US government.  Which is larger:  The amount spent by private consumers or the amount spent by the US government?  Explain.  [6 pts]

9.         Suppose that the “inverse” demand curve for a 1 lb bag of peanuts can be described as P = 10 – 0.02Qd and the “inverse” supply curve can be described as P = 0.013Qs.

a.         Solve for the equilibrium price and quantity and show this on a market model with all intercepts properly identified.  [5 pts]

b.         Now suppose that the world price is \$2 per bag.  Show this on your graph on the previous page.  If American peanut farmers successfully lobby the government to impose a quota of 150 bags of peanuts, what will be the ultimate price that domestic prices will receive and US consumers will have to pay?  Show this on the market model on the previous page as well.  [5 pts]

10.       Suppose that the demand function for hotel rentals in Spokane can be described as:  Qd = 150 – 0.50 P and the supply function can be described as:  Qs = P where the price is expressed in dollars per night and the quantity is average nightly rentals.

a.         Graph both functions on a market model below and identify the equilibrium price and quantity.  [3 pts]

b.         Suppose that the city of Spokane wants to increase revenues and imposes a \$5 per night sales tax on hotel rentals.  Calculate the new equilibrium price and quantity.  [2 pts]

c.         Including the sales tax, how much will consumers be paying for a nightly rental? [1 pt]

d.         How much will firms get to keep per nightly rental?  [1 pt]

e.         What percentage of the tax will be paid by consumers?  [1 pt]

f.          What percentage of the tax will be paid by the firms?  [1 pt]

g.         Show the imposition of the sales tax on your market model above. [1 pt]

 Subject Business Due By (Pacific Time) 11/02/2014 09:00 pm
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