Question

Question 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

15 million

10

2

12

9

4

9

8

6

6

7

8

3

6

10

1

a) What are the equilibrium price and quantity of Frisbees?

b) Frisbees manufacturers persuade the government that Frisbees production improves scientists, understanding of aerodynamics and thus is important for national security. A concerned Parliament votes to impose a prices floor $2 above the equilibrium price. What is the new market price? How many Frisbees are sold?

c) Irate students march on Ottawa and demand a reduction in the price of Frisbees. An even more concerned Parliament votes to repeal the price floor and impose a price ceiling $1 below the former price floor. What is the new market price? How many Frisbees are sold?

Question 2: A subsidy is the opposite of a tax. With a $0.50 tax on the buyers of ice-cream cones, the government collects $0.50 for each cone purchased, with a $0.50 subsidy for the buyers of ice-cream cones, the government pays buyers $0.50 for each cone purchased.

a) Show the effect of a $0.50 per cone subsidy on the demand curve for ice-cream cones, the effective price paid by consumers, the effective price received by sellers, and the quantity of cones sold.

b) Do consumers gain or lose from this policy? Do producers gain or lose? Does the government gain or lose?

Question 3: The demand and supply functions for hockey sticks are given by

QD = 286 – 20p

QS = 88 + 40p

In order to raise revenue to finance minor hockey so that Canada can continue its gold medal streak at the Olympics, the federal government decides to impose a tax of $2 per hockey stick sold, to be paid by the buyers of hockey sticks.

a) Determine the equilibrium price and quantity of hockey sticks both before and after tax. How is the burden of the tax shared between buyer and seller?

b) How many hockey sticks would be sold before the tax is imposed? After the tax?

c) Graph the supply and the demand curves for hockey both before and after the tax clearly showing the intercepts and equilibrium outcomes.

d) What would happen if the sellers of hockey sticks instead of the buyers paid the tax?

Question 4: It is hot day, and Bert is thirsty, here is the value he places on a bottle of water:

Value of first bottle $7

Value of second bottle $5

Value of third bottle $3

Value of fourth bottle $1

a) From this information, derive Bert’s demand schedule. Graph his demand curve for bottled water

b) If the price of a bottle of water is $4, how many bottles does Bert buy? How much consumer surplus does Bert get from his purchases? Show Bert’s consumer Surplus in your graph.

c) If the price falls to $2, how does quantity demanded change? How does Bert’s consumer surplus change? Show these changes in your graph?

Question 5: Following consumers are willing to pay the following amount for haircut.

Jerry: $7

Oprah: $2

Ricki: $8

Montel: $5

Four haircutting businesses have the following costs:

Firm A: $3

Firm B: $6

Firm C: $4

Firm D: $2

Each firm has the capacity to produce only one haircut. For efficiency, how many haircuts should be given? Which businesses should cut hair, and which consumers should have their haircut? How large is the maximum possible total surplus?

Question 6: Consider the following information for a consumer who is trying to allocate her income between goods X and Y so as to maximize utility. The price of X is $2 and the price of Y is $1 per unit. When all income is spent, the marginal utility of the last unit of X is 20 and the marginal utility of the last unit of Y is 16.

1. Why is the consumer not in equilibrium?

2. To increase utility, which good should this consumer consume more of and which less of?

Question 7: Suppose that Andre Agassi spends his entire income of $8 on razors and toy tennis rackets. The price of a razor is $2 and the price of a tennis racket is $4. The marginal utility of each good is independent of the amount consumed of the other good.

Andre’s Marginal Utility

Marginal Utility

Quantity

Razors

Rackets

1

20

36

2

18

32

3

16

20

4

8

16

a) If Andre is maximizing his utility. How many units of each good should be purchase?

b) If Andre’s income rises to $24, how many units of each good should be purchase?

c) Using the information above, calculate Andre’s income elasticity of demand for razors.

Question 8: Suppose that Igor maximizes his utility by spending his entire income on bats and lizards. The marginal utility of each good is independent of the amount consumed of the other good.

IGOR’s Marginal Utility

Marginal Utility

Quantity

Bats

Lizards

1

20

45

2

18

40

3

16

25

4

8

20

Igor’s income is $16. The price of a bat is $2, and he buys 3 bats. If the marginal utility of the lizard he buys is 40. Calculate the price of a lizard using two separate methods.

Question 9: What two conditions are met when a consumer in maximizing utility?

Question 10: Sally consumes only two goods, shoes and “everything else”. For five different shopping trips (each with different prices), the prices and Sally’s marginal utilities are shown below.

Shoes

Everything Else

MU

Prices ($)

MU

Prices ($)

Trip 1

125

250

50

100

Trip 2

100

200

50

100

Trip 3

75

150

50

100

Trip 4

50

100

50

100

Trip 5

25

50

50

100

a) Is sally maximizing her total utility on each shopping trip? Explain why or why not?

b) Using what you have learned in this chapter about marginal utility, explain how the number of shoes consumed is changing as their price changes.

c) Can you detect the shape of Sally’s demand curve for shoes from the data shown in the table?

it is from microeconomics

Answer 1

The answers to sub parts of Question 1 and 2 are attached.