# 1.3. A firm produces cellular telephone service using equipment and labor.

When it uses E machine-hours of equipment and hires L person-hours of labor, it can provide up to Q units of telephone service. The relationship between Q, E, and L is as follows: Q = pEL. The firm must always pay PE for each machine-hour of equipment it uses and PL for each person-hour of labor it hires. Suppose the production manager is told to produce Q = 200 units of telephone service and that she wants to choose E and L to minimize costs while achieving that production target. a) What is the objective function for this problem? b) What is the constraint? c) Which of the variables (Q, E, L, PE , and PL) are exogenous? Which are endogenous? Explain. d) Write a statement of the constrained optimization problem. 1.9. Suppose the supply curve for wool is given by Qs = P, where Qs is the quantity offered for sale when the price is P. Also suppose the demand curve for wool is given by Qd = 10 P + I , where Qd is the quantity of wool demanded when the price is P and the level of income is I. Assume I is an exogenous variable. a) Suppose the level of income is I = 20. Graph the supply and demand relationships, and indicate the equilibrium levels of price and quantity on your graph. b) Explain why the market for wool would not be in equilibrium if the price of wool were 18. c) Explain why the market for wool would not be in equilibrium if the price of wool were 14. 1.10. Consider the market for wool described by the supply and demand equations in Problem 1.9. Suppose income rises from I1 = 20 to I2 = 24. a) Using comparative statics analysis, find the impact of the change in income on the equilibrium price of wool. b) Using comparative statics analysis, find the impact of the change in income on the equilibrium quantity of wool. 1.13. A major automobile manufacturer is considering how to allocate a \$2 million advertising budget between two types of television programs: NFL football games and PGA tour professional golf tournaments. The following table shows the new sports utility vehicles (SUVs) that are sold when a given amount of money is spent on advertising during an NFL football game and a PGA tour golf event.

New SUV Sales Generated(thousands of vehicles per year) TotalSpent (millions) NFL Football PGA Tour Golf

\$0 \$0.5 \$1.0 \$1.5 \$2.0

0 10 15 19 20

0 4 6 8 9

The manufacturer¶s goal is to allocate its \$2 million advertising budget to maximize the number of SUVs sold. Let F be the amount of money devoted to advertising on NFL football games, G the amount of money spent on advertising on PGA tour golf events, and C(F,G) the number of new vehicles sold. a) What is the objective function for this problem? b) What is the constraint? c) Write a statement of the constrained optimization problem. d) In light of the information in the table, how should the manufacturer allocate its advertising budget? 1.16. Which of the following statements suggest a positive analysis and which a normative analysis? a) If the United States lifts the prohibition on imports of Cuban cigars, the price of cigars will fall. b) A freeze in Florida will lead to an increase in the price of orange juice. c) To provide revenues for public schools, taxes on alcohol, tobacco, and gambling casinos should be raised instead of increasing income taxes. d) Telephone companies should be allowed to offer cable TV service as well as telephone service. e) If telephone companies are allowed to offer cable TV service, the price of both types of service will fall. f ) Government subsidies to farmers are too high and should be phased out over the next decade. g) If the tax on cigarettes is increased by 50 cents per pack, the equilibrium price of cigarettes will rise by 30 cents per pack. 2.3. The demand and supply curves for coffee are given by Qd = 600 2P and Qs = 300 + 4P. a) Plot the supply and demand curves on a graph and show where the equilibrium occurs. b) Using algebra, determine the market equilibrium price and quantity of coffee. 2.10. Suppose that the quantity of corn supplied depends on the price of corn (P) and the amount of rainfall (R). The demand for corn depends on the price of corn and the level of disposable income (I). The equations describing the supply and demand relationships are Qs = 20R + 100P and Qd = 4000 100P + 10I . a) Sketch a graph of demand and supply curves that shows the effect of an increase in rainfall on the equilibrium price and quantity of corn. b) Sketch a graph of demand and supply curves that shows the effect of a decrease in disposable income on the equilibrium price and quantity of corn. 2.4. Suppose that demand for bagels in the local store

is given by equation Qd = 300 _ 100P. In this equation, P denotes the price of one bagel in dollars. a) Fill in the following table:
P 0.10 0.45 0.50 0.55 2.50 Qd _Q, P

b) Plot this curve in a graph. Is it linear? c) At what price is demand unitary elastic? 2.16. Consider the following demand and supply relationships in the market for golf balls: Qd = 90 2P 2T and Qs = 9 + 5P 2.5R, where T is the price of titanium, a metal used to make golf clubs, and R is the price of rubber. a) If R = 2 and T = 10, calculate the equilibrium price and quantity of golf balls. b) At the equilibrium values, calculate the price elasticity of demand and the price elasticity of supply. c) At the equilibrium values, calculate the cross-price elasticity of demand for golf balls with respect to the price of titanium. What does the sign of this elasticity tell you about whether golf balls and 2.19. For the following pairs of goods, would you expect the cross-price elasticity of demand to be positive, negative, or zero? Briefly explain your answer. a) Red umbrellas and black umbrellas b) Coca-Cola and Pepsi c) Grape jelly and peanut butter d) Chocolate chip cookies and milk d) Computers and software 2.23. In each of the following pairs of goods, identify the one which you would expect to have a greater price elasticity of demand. Briefly explain your answers. a) Butter versus eggs b) Trips by your congressman to Washington (say, to vote in the House) versus vacation trips by you to Hawaii c) Orange juice in general versus the Tropicana brand of orange juice

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