Question 1
On a summer day, an increase of the temperature from 90 degrees Fahrenheit (°F) to 100 degrees Fahrenheit (°F) increases the ice cream consumption from 50 gallons to 100 gallons of a local ice cream shop.
(a) Describe the concept of a "temperature elasticity of ice cream."
(b) Calculate the temperature elasticity of demand for ice cream using the information provided.
(c) Determine in what range of elasticity your result falls. Interpret your result on ice cream consumption.
Question 2
Assume the market for fruit from a local fruit stand has the supply and demand curves given below.
P = 0.9 - 0.08 Q P = 0.1 + 0.02 Q
Where P is in dollars and Q is in hundreds of pounds. Use the information given to
(a) Find equilibrium price and quantity in the market.
(b) Calculate consumer surplus at equilibrium.
(c) Calculate producer surplus at equilibrium.
(d) Determine total economic surplus.
(e) Calculate and discuss the loss in total economic surplus if a price ceiling is imposed on the market at a price of $0.20.
Question 3
Suppose the book-printing industry is competitive and begins in a long-run equilibrium.
(a) Draw a diagram describing the typical firm in the industry.
(b) Hi-Tech Printing Company invents a new process that sharply reduces the cost of printing books. Explain the effect of this new process on Hi-Tech's profits and the price of books in the short run when Hi-Tech's patent prevents other firms from using this new technology.
(c) Examine the long run effect when the patent expires and other firms are free to use the technology.