1. A recent study found that the demand and supply schedules for Frisbees are as follows:
|
Price per Frisbee
|
Quantity Demanded
|
Quantity Supplied
|
|
$11
|
1 million Frisbees
|
15 million Frisbees
|
|
10
|
2
|
12
|
|
9
|
3
|
9
|
|
8
|
6
|
6
|
|
7
|
8
|
3
|
|
6
|
10
|
1
|
a. What are the equilibrium price and quantity of Frisbees?
b. Frisbee manufacturers persuade the government that Frisbee production improves scientists' understanding of aerodynamics and thus is important for national security. A concerned Congress votes to impose a price floor $2 above the equilibrium price. What is the new market price? How many Frisbees are sold?
2. Suppose we are analyzing the market for hot chocolate. Graphically illustrate the impact each of the following would have on demand or supply. Also show how equilibrium price and equilibrium quantity would change. Each question part requires a labeled graph. You need only label the points on the graph pertinent to the question.
a. Winter starts and the weather turns sharply colder (assume that cocoa beans are grown in areas that are not affected by weather here).
b. The price of coffee, a substitute for hot chocolate, falls.
c. A better method of harvesting cocoa beans is introduced.
d. Producers expect the price of hot chocolate to increase next month.
3. As oil prices rose during 2006, the demand for alternative fuels increased. Ethanol, one alternative fuel, is made from corn. According to an article in the Wall Street Journal, the price of tortillas, which are made from corn, also rose during 2006: "The price spike (in tortillas) is part of a ripple effect from the ethanol boom".
a. Draw a demand and supply graph for the corn market and use it to show the effect on this market of an increase in the demand for ethanol. Be sure to indicate the equilibrium price and quantity before and after the increase in the demand for ethanol.
b. Draw a demand and supply graph for the tortilla market and use it to show the effect of this market of an increase in the price of corn. Once again be sure to indicate the equilibrium price and quantity before and after the increase in the demand for ethanol.
4. Suppose that Bill owns an automobile collision repair shop. The table below shows how the quantity of cars Bill can repair per month depends on the number of works that he hires. Assume that he pays each worker $4,000 per month and his fixed cost is $6,000 per month.
a. Using the information provided complete the table
|
Quantity of Workers
|
Quantity of Cars per Month
|
Fixed Costs
|
Variable Costs
|
Total Costs
|
Average Total Costs
|
Marginal Costs
|
|
0
|
0
|
|
|
|
|
|
|
1
|
20
|
|
|
|
|
|
|
2
|
30
|
|
|
|
|
|
|
3
|
40
|
|
|
|
|
|
|
4
|
50
|
|
|
|
|
|
|
5
|
55
|
|
|
|
|
|
b. Draw the average total cost curve and marginal cost curve for Bill's repair shop. Do these curves have the expected shape? Briefly explain.
5. Briefly explain whether the demand for each of the following products is likely to be elastic or inelastic
a. Milk
b. Agricultural goods in general
c. Soda
d. Insulin
6. Suppose that Andy sells Basketballs in the perfectly competitive basketball market. His output per day and his costs are as follows:
|
Output per day
|
Total Cost ($)
|
|
0
|
10.00
|
|
1
|
20.50
|
|
2
|
24.50
|
|
3
|
28.50
|
|
4
|
34.00
|
|
5
|
43.00
|
|
6
|
55.00
|
|
7
|
72.00
|
|
8
|
93.00
|
|
9
|
119.00
|
a. If the current equilibrium price in the basketball market is $12.50, how many basketballs will Andy produce, what price he will she charge and how much profit (or loss) will he make? Draw a graph to illustrate your answer. Your graph should be clearly labeled and should include Andy's demand, ATC, AVC, MC and MR curves; the price he is charging, the quantity he is producing and the area representing his profit (or loss).
b. Suppose the equilibrium price of basketball falls to $6.00. Now how many basketballs will Andy produce?
7. Paul has acquired a monopoly on the production of baseballs (don't ask how) and faces the demand and cost situation shows in the following table:
|
Price
|
Quantity (per week)
|
Total Revenue
|
Marginal Revenue
|
Total Cost
|
Marginal Cost
|
|
$20
|
15,000
|
|
|
$330,000
|
|
|
19
|
20,000
|
|
|
365,000
|
|
|
18
|
25,000
|
|
|
405,000
|
|
|
17
|
30,000
|
|
|
450,000
|
|
|
16
|
35,000
|
|
|
500,000
|
|
|
15
|
40,000
|
|
|
555,000
|
|
a. Fill the remaining values in the tables
b. If Paul wants tomaximize profits, what price should he changes and how many baseballs should he sell? Draw a graph to illustrate your answer.
8. Suppose you decide to open a copy store. You rent a store (sign a one year lease to do so), and you take out a loan at a local bank and use the money to purchase 10 copiers. Six months later, a large chain opens a copy store two blocks away from yours. As a result, the revenue you receive from your copy store, while sufficient to cover the wage of your employees and the costs of paper and utilities, doesn't cover all your fixed costs (rent and the interest and repayment costs on the loan you took to purchase the copiers).
Should you continue operating your business?