Homework 2

Econ 50
Due Sept. 15
Professor Helland
1) The following Mr. As annual demand for pencils.
Price per unit
$2.00
1.90
1.80
1.70
1.60
1.50
1.40
1.30
1.20
1.10

Quantity
1
2
3
4
5
6
7
8
9
10

Personal Value
Total
Marginal

Revenue
Total

Marginal

a) Complete the total and marginal personal use value and total and marginal revenue columns.
b) The demand schedule shows that at a price of $2, the annual consumption is 1 unit. At a price of $1.90,
the annual consumption is 2 units. Can it be said that this person wants each one of those 2 units more than
$1.90 worth of any other goods?
c) Note that at the price of $2 the personal annually spends $2 on this good, whereas at a price of $1.90 the
person spends $3.80 or $1.80 more than previously. Do you still say the persona values the extra unit at
approximately $1.90 even though he spends only $1.80 more? Explain why. In doing so explain what is
meant by value.
2) The government has decided that the free-market price of cheese is too low.
a) Suppose the government imposes a binding price floor in the cheese market. Use a supplydemand diagram to show the effect of this policy on the price of cheese and the quantity of cheese
sold. Is there a shortage or a surplus of cheese?
b) Farmers complain that the price floor has reduced their total revenue. Is this possible? Explain.
c) In response to farmers complaints, the government agrees to purchase all of the surplus cheese
at the price floor. Compared to the basic price floor who benefits from this policy? Who loses?
3) The market for tickets to the symphony can be described by the following demand and supply curves:
Qd=20,000-90P
Qs=10,000+110P
a) What are the equilibrium price and quantity in the ticket market?
b) Lovers of classical music persuade Congress to impose a price ceiling of $40 per ticket. How
many tickets are now sold in the market? Does this policy get more or fewer people to attend
classical music concerts?
4) True, False, or Uncertain: Milk is at the back of the store because that way you have to go through the
whole store and are likely to buy lots of other stuff along the way. (Hint this question is based on an
EconTak podcast Munger on Milk available at (http://www.econtalk.org/).