1 Show a consumer’s budget line for ham and cheese if the price of ham is $8, price of cheese is $5, and he has $200 of income. Remember to label your axes. Write down exact values for the endpoints and slope of the budget line. 2 Answer the following True/False questions that refer to the same situation as Problem #1 by circling the correct answer. TRUE FALSE cheese and no ham. The consumer could afford to buy 25 units of TRUE FALSE ham and no cheese. The consumer could afford to buy 25 units of TRUE FALSE ham and 20 units of cheese. The consumer could afford to buy 20 units of TRUE FALSE If the consumer bought 10 units of ham and 10 units of cheese, he would be correctly solving his consumer problem. TRUE FALSE If the price of ham increased, the maximum amount of cheese the consumer could afford would decrease. TRUE FALSE If the price of ham increased and the consumer continued to buy at least 1 unit of ham, the amount of cheese the consumer could afford would decrease. 1 3 For a given good at a given price, if the amount of that good that producers supply EXCEEDS the amount that consumers demand, what will happen to the price of that good? Circle the correct answer below. PRICE WILL GO UP PRICE WILL NOT CHANGE PRICE WILL GO DOWN 4 Fill in the blanks below. a. If the cross price elasticity of demand between two goods is positive, those goods are called _______________________ goods. b. If the cross price elasticity of demand between two goods is negative, those goods are called _______________________ goods. c. If the income elasticity of demand for a good is positive, that good is called a ___________________ good. d. If the income elasticity of demand for a good is negative, that good is called a ____________________ good. e. The same price elasticity of demand for a good is always _____________ since demand curves slope downward. 5 If a demand curve is perfectly elastic and consumers buy 200 units of the good at a price of $6, how many units will be purchased if the price increases to $7.50? 6 If a demand curve is perfectly inelastic and consumers buy 200 units of the good at a price of $6, how many units will be purchased if the price increases to $7.50? 7 Explain why allowing the producer to choose his inputs (amount of labor, capital, land, etc) allows him to affect the shape/size of the PPF, which we previously had assumed was his immutable production limitation. 2 8 Jeff’s income elasticity of demand for Porsches is 4. If he owns two Porsches when he makes $750,000, how much money would he have to make in order to buy one more Porsche? SHOW YOUR WORK. Given Need to find IED = If Qf = Qi = Ii = (I suggest a setup like the above in completing elasticity problems. Lay out exactly what information the problem has given you and which piece you’re being asked to find.) 9 Joe’s hot dog stand projects the following demand for hot dogs: Price $3 $4 $5 Quantity Purchased (per day) 60 50 35 Calculate the same price elasticity of demand between $3 and $4. SHOW YOUR WORK. Calculate the same price elasticity of demand between $4 and $5. SHOW YOUR WORK. 3 10 The initial quantity demanded of Pepsi is 75 when the price of Coke is $1.50. If the price of Coke increases to $2 and the quantity demanded of Pepsi goes up to 150, what is the cross price elasticity of demand for Pepsi/Coke at those price levels? SHOW YOUR WORK. 11 What happens to equilibrium price and quantity in the following scenarios? Circle the correct answer for each scenario below. A Supply shifts left and demand shifts right PRICE -> GOES UP QUANTITY -> GOES UP UNDETERMINED GOES DOWN UNDETERMINED GOES DOWN B Supply shifts right and demand shifts left PRICE -> GOES UP QUANTITY -> GOES UP UNDETERMINED GOES DOWN UNDETERMINED GOES DOWN C Demand and supply both increase PRICE -> GOES UP QUANTITY -> GOES UP UNDETERMINED GOES DOWN UNDETERMINED GOES DOWN 4 12 Show the derivation of a demand curve from the underlying fundamentals of consumers solving their problem. In other words, show a budget constraint and indifference curve that shows a consumer solving his problem. Then change the price of good 1 (either decrease or increase it) and show the new amount of good 1 consumed (assume the indifference curves are basically parallel and behave “nicely”). Change the price one more time (in the same direction) and show the new amount of good 1 consumed. Plot your three (Q, P) points on a separate graph to reveal your demand curve. Please circle the correct answer for the multiple-choice questions that follow. 1 Which of the following events would shift the demand curve for gasoline to the left? a. The income of gasoline buyers rises and gasoline is a normal good. b. The income of gasoline buyers falls and gasoline is an inferior good. c. Public service announcements run on television encourage people to walk or ride bicycles instead of driving cars. d. The price of gasoline rises. e. The price of gasoline falls. f. Both b. and d. g. None of the above 2. Which of the following would cause the demand curve for an inferior good to shift to the left? a. Decrease in income b. Increase in price of a substitute good c. Increase in price of a complement good 3. Suppose that a decrease in the price of good X results in fewer units of good Y being sold. This implies that X and Y are a. Complementary goods b. Normal goods c. Inferior goods d. Substitute goods e. Giffen goods 4. When supply and demand both increase, equilibrium a. Price will increase b. Price will decrease c. Quantity may increase, decrease, or stay the same d. Price may increase, decrease, or stay the same e. Price and quantity will both increase 5
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