Econ 115 Summer 2013 Problem Set 1 (10 points) Chapters 1-3

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1. (1 point) You have to decide whether to go skiing for the day or stay at home and study. Skiing gives you a benefit equivalent to $100, but you will have to pay $60 for the skiing pass. You use your own car to drive to the skiing area, and the gas needed to drive there and back costs $15. At the beginning of winter you have also bought snow tires for your car and you have calculated that the cost of snow tires per day is $25. If you stay at home and study, your benefit will be $20. After calculating the costs and benefits, do you stay home and study or go skiing? Show your calculations.

2. (1.25 points; 0.25 each) You have just been called in by Congress to give advice on the rice market facing American farmers. For each of the following events analyze what will be the effect on the equilibrium price and quantity facing U.S. farmers. Show whether the demand curve or the supply curve shifts. a. The Japanese eliminate restrictions on sales of U.S. rice.

b. A new strain of wonder rice is developed which increases productivity.

c. Rice is found to cause cancer in white mice.

d. The price of wheat increases.

e. The price of fertilizer used in rice production increases.

3. (1 point) The market for automobiles in New Haven has supply and demand curves given by P=2Qs and P=30,000-Qd , respectively. a. (0.25 points) How many units will be traded at a price of $24,000? Which participants (buyers or sellers) will be dissatisfied?

b. (0.25 points) How many units will be traded at a price of $12,000? Which participants (buyers or sellers) will be dissatisfied at this price?

c. (0.5 points) How many cars and at what price will be sold at equilibrium? Show your answer using algebra and a graph.

4. (2 points; 0.5 each) The market for automobiles in New Haven is as described in Problem 3. The city of New Haven is currently thinking about ways to raise revenue. One proposal is a tax on automobiles, levied on consumers. Suppose the tax is $6,000 per automobile. Show your answer using algebra and a graph. a. How many automobiles will now be sold and at what price? ________; $_______

b. What is the tax burden on consumers? (in $ per automobile)

$________

c. What is the tax burden on the sellers? (in $ per automobile)

$_________

d. What is the total tax revenue to the state?

$_________

5. (1 point; 0.25 each)) Suppose the number of seats at a football stadium is fixed at 30,000. The government decides to raise revenue by imposing a $5 tax on each ticket, collected from the seller. a. What is the tax burden on the ticket buyer in percent of the tax? ________

b. What is the burden on the seller in percent of the tax? ________

c. What is the revenue collected by the government? ________

d. Show your answer on a graph.

6. (1 point; 0.5 each) Suppose hot dogs cost $1.50 each and ice-cream costs $3.00 per portion. You have $18 to spend. a. With hot dogs on the vertical axis, graph your budget line, indicating the dollar value of the vertical and horizontal intercepts. What is the slope of this line?

b. Your utility function is U(H, I) = H2I, where H is the number of hot dogs and I is the number of ice cream portions. What combination of hot dogs and ice cream portions maximizes your utility? Add the indifference curve to your budget line and indicate your optimal consumption point. Number of hot dogs: _______ Portions of ice cream: _______

7. (1 point; 0.25 each) You have $21 to spend on beer and pizza. Beer costs $1 per bottle and pizza costs $1.50 per slice. Each question makes a different assumption about your preferences. (Assume that you are a rational individual.) For each question, graph your budget constraint and indifference curves, with pizza on the horizontal axis. a. You always want to consume beer and pizza in a fixed proportion: you think that each slice of pizza is only good if you have it with 2 bottles of beer. Any more of only one of the two goods makes you neither better nor worse off. How much beer will you drink?

b. You realize that the nutritious value (in calories) of one bottle of beer is equivalent to that of one slice of pizza. Since you only care about the calories you consume (and more calories are better than fewer), you will consume how many bottles of beer?

c. You are indifferent to alcohol (it is a neutral good for you). You only care about pizza, and whether you consume more or less beer is all the same to you: all you care about is pizza. How much beer will you consume?

d. The price of beer doubles. Assume your indifference curves are as in question b). As a result of the increase in the beer price you are now worse off. How much extra income would you need to be as well off as you were before the price increase?

8. (1.75 points) Sue has a marginal rate of substitution of food for clothing equal to 5 (she is willing to trade off 5 units of clothing for 1 unit of food.) The price of clothing is 1 and the price of food is 8. a. (0.75 points) Is Sue maximizing her utility? How do you know? If Sue is not maximizing, what should she do to improve her situation? (Should she consume more food or more clothing?)

b. (1 point) Draw a graph with a budget constraint and a couple of indifference curves to illustrate your answer. (Put food on the horizontal axis.)