1) Refer to Figure 4-1. Arnold's marginal benefit from consuming the third burrito is A) $1.25. B) $1.50. C) $2.50. D) $6.00.

Transcription

1 ECON , FALL 2011 Principles of Microeconomics Homework 2 Instructor: Sung Ick Cho Figure 4-1 Figure 4-1 shows Arnold's demand curve for burritos. 1) Refer to Figure 4-1. Arnold's marginal benefit from consuming the third burrito is A) $1.25. B) $1.50. C) $2.50. D) $ ) Refer to Figure 4-1. If the market price is $1.00, what is the consumer surplus on the third burrito? A) $0.50 B) $1.00 C) $1.50 D) $7.50 3) Refer to Figure 4-1. If the market price is $1.00, what is Arnold's consumer surplus? A) $1.00 B) $2.00 C) $6.00 D) $7.00 4) Refer to Figure 4-1. What is the total amount that Arnold is willing to pay for 4 burritos? A) $1.00 B) $4.00 C) $7.00 D) $ ) Refer to Figure 4-1. If the market price is $1.00, what is the maximum number of burritos that Arnold will buy? A) 1 B) 2 C) 3 D) 4 1

2 Figure 6-4 6) Refer to Figure 6-4. Which of the following statements is true about the price elasticity of demand? A) The elasticity coefficient is constant along the demand curve. B) The elastic portion of a straight-line downward sloping demand curve corresponds to the segment above the midpoint. C) The inelastic portion of the demand curve corresponds to the segment above the midpoint. D) At the midpoint of the demand curve, the elasticity coefficient is zero. 7) Refer to Figure 6-4. The inelastic segment of the demand curve A) is coincident with the horizontal axis. B) is coincident with the vertical axis. C) lies below the midpoint of the curve. D) lies above the midpoint of the curve. 8) Refer to Figure 6-4. At the midpoint of the demand curve, in absolute value, A) the price elasticity coefficient is at a maximum. B) the price elasticity coefficient is at a minimum. C) the price elasticity coefficient is zero. D) the price elasticity coefficient is one. 2

3 9) Consider the following pairs of items: a. shampoo and conditioner b. iphones and earbuds c. a laptop computer and a desktop computer d. beef and pork e. air-travel and weed killer Which of the pairs listed will have a negative cross-price elasticity? A) a and b only B) c and d only C) e only D) a, b, and c only 10) Consider the following pairs of items: a. shampoo and conditioner b. iphones and earbuds c. a laptop computer and a desktop computer d. beef and pork e. air-travel and weed killer Which of the pairs listed will have cross-price elasticity of zero? A) a and b only B) c only since most people cannot do without computers C) e only D) none of the pairs listed 3

4 11) Assume the market price for lemon grass is $4.00 per pound, but most buyers are willing to pay more than the market price. At the market price of $4.00, the quantity of lemon grass demanded is 1,500 pounds per month, and quantity demanded does not reach zero until the price reaches $30.00 per pound. Construct a graph showing this data, calculate the total consumer surplus in the market for lemon grass, and show the consumer surplus on the graph. 12) The graph below represents the market for walnuts. Identify the values of the marginal benefit and the marginal cost at the output levels of 2,000 pounds, 4,000 pounds and 6,000 pounds. At each of these output levels, state whether output is inefficiently high, inefficiently low, or economically efficient. 4

5 Table 4-4 Price perquantity Quantity Bushel (dollars) Demanded (bushels) Supplied (bushels) $2 40, ,000 4, ,000 8, ,000 16, ,000 20, ,000 28, ,000 36, ,000 40,000 Table 4-4 above contains information about the corn market. Answer the following questions based on this table. 13) Refer to Table 4-4. An agricultural price floor is a price that the government guarantees farmers will receive for a particular crop. Suppose the federal government sets a price floor for corn at $12 per bushel. a. What is the amount of shortage or surplus in the corn market as result of the price floor? b. If the government agrees to purchase any surplus output at $12, how much will it cost the government? c. If the government buys all of the farmers' output at the floor price, how many bushels of corn will it have to purchase and how much will it cost the government? d. Suppose the government buys up all of the farmers' output at the floor price and then sells the output to consumers at whatever price it can get. Under this scheme, what is the price at which the government will be able to sell off all of the output it had purchased from farmers? What is the revenue received from the government's sale? 5

6 e. In this problem we have considered two government schemes: (1) a price floor is established and the government purchases any excess output and (2) the government buys all the farmers' output at the floor price and resells at whatever price it can get. Which scheme will taxpayers prefer? f. Consider again the two schemes. Which scheme will the farmers prefer? g. Consider again the two schemes. Which scheme will corn buyers prefer? Figure ) Refer to Figure The figure above represents demand and supply in the market for gasoline. Use the diagram to answer the following questions. a. How much is the government tax on each gallon of gasoline? b. What portion of the unit tax is paid by consumers? c. What portion of the unit tax is paid by producers? d. What is the quantity sold after the imposition of the tax? e. What is the after-tax revenue per gallon received by producers? f. What is the total tax revenue collected by the government? g. What is the value of the excess burden of the tax? h. Is this gasoline tax efficient? 6

7 15) The Mass Rapid Transit (MRT) System in Hong Kong has been running significant losses. Transport Ministry officials have argued over whether to raise fares to combat the losses. One argument against a fare increase is that it will aggravate traffic congestion on the streets during peak commuter hours. Suppose that the current fare is $4 and the government is considering raising it to $6. Officials estimate that this reduces the number of rides purchased from 10,000 to 8,000 per day. a. What is the estimated elasticity of demand for MRT rides? b. What does this elasticity of demand suggest to you about what will happen to total revenue earned by the transit system? c. Last year, the MRT system incurred a loss of $50,000 per day. Do you think the fare increase will resolve the deficit problem as well as Ministry officials anticipate? Explain. 16) Suppose the price of gasoline in July 2004 averaged $1.35 a gallon and 15 million gallons a day were sold. In October 2004, the price averaged $2.15 a gallon and 14 million gallons were sold. If the demand for gasoline did not shift between these two months, use the midpoint formula to calculate the price elasticity of demand. Indicate whether demand was elastic or inelastic. 17) Suppose that at a price of $55, 100 units were sold while at a price of $33, 153 units were sold. Without calculating the price elasticity value, can you determine whether it is elastic, unit-elastic, or inelastic? Explain your answer. 7