Problem Set 3
Due February 6th, 2019
1. Assume the market for fruit from a local fruit stand has the supply and demand curves given
Demand: P = 150 – 3*Q
Supply: P = 10 + Q
a. Graph supply and demand. Be sure to label all intercepts.
b. If P = $60, what quantity of fruit will consumers want to buy?
c. If P = $60, what quantity of fruit will firms want to sell?
d. Find equilibrium price and quantity in the market for fruit, and label it on your graph.
2. A recent survey indicated that chocolate is America’s favorite ice cream flavor. For each of
the following, indicate the possible effects on demand, supply, or both, as well as the effect
on the equilibrium price and quantity in the market for chocolate ice cream.
a. A severe drought in the Midwest increases the cost of grain fed to the dairy cows.
b. A new report by the American Medical Association reveals that chocolate does, in fact,
have significant health benefits.
c. The discovery of a new dairy alternative lowers the price of dairy-free frozen treats.
d. New technology for mixing and freezing ice cream lowers manufacturers’ costs of
producing chocolate ice cream.
e. Consumer income decreases due to a recession. (You may assume that chocolate ice
cream is a normal good.)
3. Suppose you operate your own business selling t-shirts. The demand curve for t-shirts is
𝑃 = 40 − 2 ∙ 𝑄. Right now, the price of t-shirts is $30 and you sell 5 t-shirts per day.
a. Calculate your daily total revenue (TR).
b. Calculate the price elasticity of demand when P=$30.
c. Is demand elastic, inelastic or unit elastic at this point?
d. If the price of t-shirts increases, will your total revenue increase or decrease?
e. What price would result in the maximum total revenue (TR)?
4. On Monday, Maggie worked all day selling cookies and her total revenue was $50. On
Tuesday Maggie decided to raise her prices so that she could make more money, but at the
end of the day on Tuesday she had only made $40. Maggie is confused, and comes to you for
advice. Explain why this happened using your knowledge of price elasticity.
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