Answer the following question and draw a diagram where necessary
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1.
University fees in the State of Nirvana have been frozen in real terms for 10 years. During this period enrolments increased by 20 percent, reflecting an increase in demand. This means the supply curve is horizontal at a given price.
a)
Draw a supply curve and two demand curves to represent the two equilibriums described.
b)
Can you estimate the price elasticity of demand for university education in this market?
c)
In contrast, during the same time period fees in a neighboring state (where supply is also horizontal) increased by 60 percent, and enrolments increased by 15 percent. Illustrate this situation in a diagram, where supply is again horizontal.
2.
Waterston Power Corporation’s regulator has just allowed a rate increase from 9 to 11 cents per kilowatt hour of electricity. The short-run demand elasticity is -0.6 and the long-run demand elasticity is -1.2 at the current price.
a)
What will be the percentage reduction in power demand in the short run (use the midpoint ‘arc’ elasticity formula)?
b)
What will be the percentage reduction in power demand in the long run?
c)
Will revenues increase or decrease in the short and long runs?
3.
The demand for bags of candy is given by P = 48−0.2Q, and the supply by P = Q. The demand intercepts here are P = $48 and Q = 240; the supply curve is a 45-degree straight line through the origin.
a)
Illustrate the resulting market equilibrium in a diagram knowing that the demand intercepts are {$48, 240}, and that the supply curve is a 45-degree line through the origin.
b)
If the government now puts a $12 tax on all such candy bags, illustrate on a diagram how the supply curve will change.
c)
Instead of the specific tax imposed in part (b), a percentage tax (ad valorem) equal to 30
d)
Percent is imposed. Illustrate how the supply curve would change.
4.
Cappuccinos, C, cost $3 each, and music downloads of your favorite artist, M, cost
$1 each from your iTunes store. Income is $24
a)
Draw the budget line, with cappuccinos on the vertical axis, and music on the horizontal axis, and compute the values of the intercepts.
(b) What is the slope of the budget constraint, and what is the opportunity cost of 1 cappuccino?
(c) Are the following combinations of goods in the affordable set: (4C and 9M), (6C and 2M),
(3C and 15M)?
(d) Which combination(s) above lie inside the affordable set, and which lie on the boundary?
5.
George spends his income on gasoline and “other goods.”
(a) First, draw a budget constraint, with gasoline on the horizontal axis.
(b) Suppose now that, in response to a gasoline shortage in the economy, the government imposes a ration on each individual that limits the purchase of gasoline to an amount less than the gasoline intercept of the budget constraint. Draw the new effective budget constraint.
6.
Suppose that movies are a normal good, but public transport is inferior. Draw an indifference map with a budget constraint and initial equilibrium. Now let income increase and draw a plausible new equilibrium, noting that one of the goods is inferior
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7.
Mario consumes only cheese and crackers.
a)
Could cheese and crackers both be inferior goods for Mario? Explain.
b)
Suppose that cheese is a normal good for Mario while crackers are an inferior good. If the price of cheese falls, what happens to Mario’s consumption of crackers?
c)
What happens to his consumption of cheese? Explain
8.
Jan is your typical economics graduate student and consumes two goods:
an economics text book and coffee. Jan also earns a stipend of $60 a month. He can spend it all on books and get 5 or he can spend it all on coffee and get $20 cups
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a)
Give this information, and construct the Jan budget line. (Put books on x-axis and coffee on Y axis).
b)
Following are the bundle of Jan can afford with his income.
Fill the above table with quantities that will exhaust Jan’s income.
c)
Jan gets a research grant and his income increases by $80 a month. What is the new equation of his budget line? What if income stays constant at $40, and the price of books increases by $10?
d)
Assume that prices are the same as used in part (a) if the marginal utility of the book is 20, what is the marginal utility of coffee if he maximizes his utility?
e)
Now assume that coffee and books are complements of Jan. for him to consume books, he needs 1 cup of coffee. How many books does he consume given his income $60, and the prices used in part a? What if economics is so boring that Jan needs 2 cups of coffee for every book that he consumes?
9.
Draw a diagram with the explanation of each case:
Goods
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P.E
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S.E
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I.E
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Normal
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Inferior
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Giffen
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