1. Suppose that we have 8 people who want to rent an apartment. Their reservation prices are given below. (To keep the numbers small,
think of these numbers as being daily rent payments.)
Person = A B C D E F G H
Price = 40 25 30 35 10 18 15 5
(a) Plot the market demand curve in the following graph. (Hint: When the market price is equal to some consumer i's reservation price, there will be two different quantities of apartments demanded, since consumer will be indifferent between having or not having an apartment.)
(b) Suppose the supply of apartments is fixed at 5 units. In this case there is a whole range of prices that will be equilibrium prices. What is the highest price that would make the demand for apartments equal to 5 units?
(c) What is the lowest price that would make the market demand equal to 5 units?
(d) With a supply of 4 apartments, which of the people A-H end up getting apartments?
(e) What if the supply of apartments increases to 6 units. What is the range of equilibrium prices?
2. You have an income of $40 to spend on two commodities. Commodity 1 costs $10 per unit, and commodity 2 costs $5 per unit
(a) Write down your budget equation
(b) If you spent all your income on commodity 1, how much could you buy?
(c) If you spent all of your income on commodity 2, how much could you buy? Use blue ink to draw your budget line in the graph below.
(d) Suppose that the price of commodity 1 falls to $5 while everything else stays the same. Write down your new budget equation line.
(e) Suppose that the amount you are allowed to spend falls to $30, while the prices of both commodities remain at $5. Write down your budget equation.
(f) On your diagram, use blue‘ihk1 to shade in the area representing commodity bundles that you can afford with the budget in Part (e) but could not afford to buy with the budget in Part (a). Use black ink or pencil to ativade in the area representing commodity bundles that you could afford with the budget in Part (a) but cannot afford with the budget in Part (e).
3. Your budget is such that if you spend your entire income, you can afford either 4 units of good x and 6 units of good y or 12 units of x and 2 units of y.
(a) Mark these two consumption bundles and thaw the budget line in the graph.
(b) What is the ratio of the price of x to the price of y?
(c) If you spent all of your income on x, how much x could you buy?
(d) If you spent all of your income on y, how much y could you buy?
(e) Write a budget equation that gives you this budget line where the price of x is 1
(f) Write another budget equation that gives you the same budget line, but where the price of x is 3
4. Martha is preparing for exams in economics and sociology. She has time to read 40 pages of economics and 30 pages of sociology. In the same amount of time she could also read 30 pages of economics and 60 pages of sociology.
(a) Assuming that the number of pages per hour that she can read of either subject does not depend on how she allocates her time, how many pages of sociology could she read if she decided to spend all of her time on sociology and none on economics? (Hint: You have two points on her budget line, so you should be able to determine the entire line.)
(b) How many pages of economics could she read if she decided to spend all of her time reading economics?
5. Shirley Sixpack is in the habit of drinking beer each evening while watching "The Best of Bowlerama" on TV. She has a strong thumb and a big refrigerator, so she doesn't care about the size of the cans that beer comes in, she only cares about how much beer she has.
(a) On the graph below, draw some of Shirley's indifference curves between 16-ounce cans and 8-ounce cans of beer.