Fiona Lee Microeconomics ECO206_03 Assignment #1 September 16th 2013 Chapter 3 (pg. 66 & 67) 1.

. Suppose there are three buyers of candy in a market: Tex, Dex, and Rex. a. Fill in the table of the missing values

Individual Quantities Demanded Price per candy $8 7 6 5 4 Tex 3 8 12 17 23 Dex 1 2 3 4 5 Rex 0 2 4 6 8 Total Quantity Demanded 4 12 19 27 36

b. Which buyer demands the least at a price of $5? The most at a price of $7? Dex demands the least price at $5 & Tex demands the most at $7 c. Which buyers quantity demanded increases the most when the price is lowered from $7 to $6? Tex demanded increased the most when the price is lowered from $7 to $6. d. Which direction would the market demand curve shift if Tex withdrew from the market? What if Dex doubled his purchases at each possible price? If Tex withdrew from the market, the market demand curve will shift to the left because of the decrease in Total Quantity Demanded. The market demand curve will shift to the right if Dex doubled his purchases at each possible price because the Total Quantity Demanded increases. e. Suppose that at a price of $6, the total quantity demanded increases from 19 to 38. Is this a change in quantity demanded or a change in demand? It will be a change in quantity demanded therefore there will be a shift in the demand curve.

2. The figure below shows the supply curve for tennis balls, S1, for Drop Volley Tennis, a produce of tennis equipment. Use the figure and the table below to give your answers to the following questions.

a. Use the figure to fill in the quantity supplied on supply curve S1 for each price in the table below. S1 Quantity Supplied $3 2 1 15 10 5

Price

S2 Quantity Supplied 4 2 0

Change in Quantity Supplied 11 8 5

b. If production costs were to increase, the quantities supplied at each price would be shown by the third column of the table (S2 Quantity Supplied). Use the data to draw supply curve S2 on the same graph as supply curve S1. Green is the supply curve S2. c. In the fourth column of the table, enter the amount by which the quantity supplied at each price changes due to the increase in production costs. d. Did the increase in production costs cause a decrease in supply or a decrease in quantity supplied? The increase in production costs causes a decrease in supply because theres a shift in the supply curve due to this factor.

3. Refer to the expanded table below from question 11. Thousands of Bushels Demanded 85 80 75 70 65 60 Price per Bushel $3.40 3.70 4.00 4.30 4.60 4.90 Thousands of Bushels Supplied 72 73 75 77 79 81 Surplus (+) or Shortage (-) (-)13 (-)7 0 (+)7 (+)14 (+)21

a. What is the equilibrium price? At what price is there neither a shortage nor a surplus? Fill in the surplus-shortage column and use it to confirm your answers. The equilibrium price is $4.00, where there is neither a shortage nor a surplus. b. Graph the demand for wheat and the supply of wheat. Be sure to label the axes of your graph correctly. Label equilibrium price P and equilibrium quantity Q.

c. How big is the surplus or shortage at $3.40? At $4.90? How big a surplus or shortage results if the price is 60 cents higher than the equilibrium price? 30 cents lower than the equilibrium price? At $3.40, there is a shortage of 13 thousand bushels. At $4.90 there is a surplus of 21 thousand bushels. If the price is 60 cents higher than the equilibrium price, there is a surplus of 14 thousand bushels. If the price is 30 cents lower than the equilibrium price, there is a shortage of 7 thousand bushels.

6. Assume that demand for a commodity is represented by the equation P=10-.2Qd and supply by the equation P=2+.2Qs, where Qd and Qs are quantity demanded and quantity supplied, respectively, and P is price. Using the equilibrium condition Qs=Qd solve the equations to determine equilibrium price. Now determine equilibrium quantity. Because, 2+.2x = 10-.2x; Then, x = 20 Equilibrium Price = $6 Equilibrium Quantity = 4 Chapter 4 (pg. 91) 1. Look at the demand curve in Figure 4.2a. Use the midpoint formula and points a and b to calculate the elasticity of demand for that range of the demand curve. Do the same for the demand curves in Figures 4.2b and 4.2c using, respectively, points c and d for Figure 4.2b and points e and f for Figure 4.2c a. 4.2a a. (10,2) b. (40,1) ((40-10)/(50/2)) / ((1-2)/(3/2)) = 1.8 b. 4.2b- c. (10,4) d. (20,1) ((20-10)/(30/2)) / ((1-4)/(5/2)) = .56 c. 4.2c e. (10,3) f. (30,1) ((30-10)/(40/2)) / ((1-3)/(4/2)) = 1 2. Investigate how demand elasticities are affected by increases in demand. Shift each of the demand curves in Figures 4.2a, 4.2b, and 4.2c to the right by 10 units. For example, point a in Figure 4.2a would shift rightward from location (10 units, $2) to (20 units, $2), while point b would shift rightward from location (40 units, $1) to (50 units, $1). After making these shifts, apply the midpoint formula to calculate the demand elasticities for the shifted points. Are they larger or smaller than the elasticities you calculated in Problem 1 for the original points? In terms of the midpoint formula, what explains the change in elasticities? a. 4.2a a. (20,2) b. (50,1) ((50-20)/(70/2)) / ((1-2)/(3/2)) = 1.29 b. 4.2b- c. (20,4) d. (30,1) ((30-20)/(50/2)) / ((1-4)/(5/2)) = .34 c. 4.2c e. (20,3) f. (40,1) ((40-20)/(60/2)) / ((1-3)/(4/2)) = .67 They are smaller elasticities than Problem 1s original points. With the increase and a shift of the demand curve to 10 addition units: figure a has become less elastic than originally, figure b because more inelastic than originally and figure c is not unit-elastic anymore and has become inelastic. 3. Suppose that the total revenue received by a company selling basketballs is $600 when the price is set at $30 per basketball and $600 when the price is set at $20 per basketball. Without using the midpoint formula, can you tell whether demand is elastic, inelastic, or unit-elastic over this price range? Because total revenue does not change when price changes, demand is unit-elastic.

4. Danny Dimes Donahue is a neighborhoods 9-year old entrepreneur. His most recent venture is selling homemade brownies that he bakes himself. At a price of $1.50 each, he sells 100. At a price of $1.00 each, he sells 300. Is demand elastic or inelastic over this price range? If demand had the same elasticity for a price decline from $1.00 to $0.50 as it does for the decline from $1.50 to $1.00, would cutting the price from $1.00 to $0.50 increase or decrease Dannys total revenue? Total Revenue = P x Q $1.50 x 100 = $150 $1.00 x 300 =$300 - Because total revenue changes in the opposite direction from price, demand is elastic (as price stop, Total Revenue increases) If demand had the same elasticity from $1.00 to $.50 as it does for the decline from $1.50 to $1.00, cutting the price from $1.00 to $.50 would increase the total revenue. Chapter 5 (pg. 113) 1. Refer to Table 5.1. If the six people listed in the tale are the only consumers in the market and the equilibrium price is $11 (not the $8 shown), how much consumer surplus will the market generate? Maximum Price Willing to Pay $13 12 11 10 9 8

Person

Actual Price (Equilibrium Price) $11 11 11 11 11 11

Consumer Surplus $2 1 0 0 0 0

Bob Barb Bill Bart Brent Betty

The market will generate $3 worth of consumer surplus if market equilibrium price is $11.

2. Refer to Table 5.2. If the six people listed in the table are the only producers in the market and the equilibrium price is $6 (not the $8 shown), how much producer surplus will the market generate? Person Maximum Price Willing to Pay $3 4 5 6 7 8 Actual Price (Equilibrium Price) $6 6 6 6 6 6 Producer Surplus $3 2 1 0 0 0

Carlos Courtney Chuck Cindy Craig Chad

The market will generate $4 worth of producer surplus if market equilibrium price is $6 3. Look at Tables 5.1 and 5.2 together. What is the total surplus if Bob buys a unit from Carlos? If Barb buys a unit from Courtney? If Bob buys a unit from Chad? If you match up pairs of buyers and sellers so as to maximize the total surplus of all transactions, what is the largest total surplus that can be achieved? The largest total surplus that can be achieved is if Bob buys a unit from Carlos, having a surplus of $10. 4. Assume the following values for Figures 5.4a and 5.4b. Q1 = 20 bags. Q2 = 15 bags. Q3 = 27 bags. The market equilibrium price is $45 per bag. The price at a is $85 per bag. The price at c is $5 per bag. The price at f is $59 per bag. The price at g is $41 per bag. Apply the formula for the area of a triangle (Area = X Base X Height) to answer the following questions. a. What is the dollar value of the total surplus (producer surplus plus consumer surplus) when allocatively efficient output level is being produced? How large is the dollar value of the consumer surplus at that output level? Consumer surplus = (20-0)(85-45) = 400 Producer Surplus = (20-0)(45-5) = 400 Total surplus = 400 + 400 = $800 b. What is the dollar value of the deadweight loss when output level Q2 is being produced? What is the total surplus when output level Q2 is being produced? Deadweight loss = (20-15)(59-31)=$70 Consumer Surplus = (45-5)(20-15)=$100 Producer Surplus= (85-45)(20-15)=$175 Total Surplus =$100+$175 = $275

c. What is the dollar value of the deadweight loss when output level Q3 is produced? What is the dollar value of the total surplus when output level Q3 is produced? Deadweight loss = (27-20)(59-31)=$98 Producer Surplus= (85-45)(27-20)=$140 Consumer Surplus = (45-5)(27-20)=$140 Total Surplus = 140+140 = $280