Question 1: Consider the following situation and the questions below

You are planning to attend college next year. The total cost of tuition and textbooks is $10,000.
If you go to school, your room and board will cost you $5,000. If you did not go to school,
however, you would live at home, and your total room and board would only be $1,000.
Additionally, if you did not go to college, you would work a job making $20,000 for the year.
1. In terms of room and board alone, what would be opportunity cost of attending college.
Be sure to explain your answer
2. What are the explicit costs of attending school? How much should be included for room
and board?
3. What would be the implicit cost of attending college next year?
4. What would be the total opportunity cost of attending college next year?
Answer:
1. The opportunity cost (room and board) is $4,000 in this case. Since you would have
spent $1,000 either way, the actual opportunity cost is $4,000 ($5,000 - $1,000).
2. The total explicit cost would be $15,000, which includes the $5,000 for room and board
as well as the cost of tuition and books. The $1,000 that would have been spent on not
attending school and remaining at home instead would be considered a "savings" and
applied to the implicit cost.
3. There would be a $19,000 implicit cost overall. You would be giving up the $20,000
you would have made by working but you would "save" the $1,000 that you would have
spent on room and board by staying at home.
4. $34,000 would be the total opportunity cost, which would be equal to the sum of the
explicit costs ($15,000) and implicit costs ($19,000).
Question 2: You commute to San Fransisco for work purposes. The distance is 75 miles. You
can drive or take a train. The train ticket is $25, and the journey takes two hours. Your wage is
$20 per hour. The cost of the car journey is $10 for gasoline, $4 for tolls, plus a depreciation
cost of $0.20 per mile for your vehicle. The car journey takes 1.5 hours
1. What is the opportunity cost in $ of getting to the city under each mode (compared to
not going)?
2. What policy would be more effective to encourage people to take the train: a 20% gas
tax or speeding up the train by 30 minutes?
3. Free wireless was just introduced on the train. How might this affect the relative
opportunity cost?
Answer:
1. Opportunity cost in $:
By train: $25 + $20*2 = $65
By car: $10 + $4 + $0.20*75 + $20*1.5 = $59
 2. 20% gas tax = $2  Increase opportunity cost $2  By car = $61; By train = $65
Train journey takes 1.5 hours = $30  Decrease opportunity cost $10  By car = $59;
By train = $55
 Speeding up the train by 30 minutes is more effective.
3. Free wireless allow people to work on the train which will reduce the opportunity cost
of the train journey for them.
Question 3: Assume the markets for sugar cane, rum and whiskey are initially in equilibrium.
Assume further that Hurricane Marilyn destroys much of the Jamaican sugar cane crop.
Analyze the effect of the hurricane on the markets for each of the three goods? Explain using
graphs?
Answer:
The hurricane damage to the sugar cane crop will cause the supply of sugar cane curve to shift
to the left. Holding everything else constant in the sugar cane market, the equilibrium price of
sugar cane will increase and the equilibrium quantity of sugar cane will decrease.
In the market for rum, the increased price of sugar cane will cause the supply curve of rum to
shift leftward as the price of an input to rum (the sugar cane) increases. The equilibrium price
of rum will increase and the equilibrium quantity of rum will decrease.
In the market for whiskey, the rise in the price of rum (a substitute good) will cause the demand
curve for whiskey to shift to the right as consumers switch from consuming the relatively more
expensive rum to the relatively less expensive whiskey. In the market for whiskey the
equilibrium price of whiskey will increase and the equilibrium quantity of whiskey will
increase.
Question 4: A survey indicated that chocolate is Americans’ favorite ice cream flavor. For
each of the following, indicate the possible effects on demand, supply, or both as well as
equilibrium price and quantity of chocolate ice cream.
1. A severe drought in the Midwest causes dairy farmers to reduce the number of milk-
producing cattle in their herds by a third. These daily farmers supply cream that is used
to manufacture chocolate ice cream
2. A new report by the American Medical Association reveals that chocolate does, in fact,
have significant health benefits
3. The discovery of cheaper synthetic vanilla flavoring lowers the price of vanilla ice
cream
4. New technology for mixing and freezing ice cream lowers manufacturers’ costs of
producing chocolate ice cream
Answer:
1. By reducing their herds, dairy farmers cause the supply of cream to decrease – a
leftward shift of the supply curve for cream. As a result, the market price of cream rises,
which means that a unit of chocolate ice cream is more expensive to produce. This
 result in a leftward shift of the supply curve for ice cream producers reduce the quantity
of chocolate ice cream supplied at any given price. This lead to a rise in the equilibrium
price and a fall in the equilibrium quantity.
2. Consumers will now demand more chocolate ice cream at any given price, representing
a rightward shift of the demand curve. As a result, both equilibrium price and quantity
rise.
3. The price of a substitute (vanilla ice cream) has fallen, and consumers will tend to
substitute it for chocolate ice cream. The demand for chocolate ice cream decreases,
representing a leftward shift of the demand curve. Both equilibrium price and quantity
fall.
4. Because the cost of producing ice cream falls, manufacturers are willing to supply
more units of chocolate ice cream at any given price. This is represented by a rightward
shift of the supply curve and result in a fall in the equilibrium price and a rise in the
equilibrium quantity.
Question 5: Michael has just finished recording his latest CD. His record company’s
marketing department determines that the demand for the CD is as follows:
Price
Number of CDs (thousands)
($)

24 10

22 20

20 30

18 40

16 50

14 60

The company can produce the CD with no fixed cost and a variable cost of $5 per CD

a. What is the marginal revenue for each 10,000 increase in the quantity sold?
b. What quantity of CDs would maximize profit? What would the price be? What would
the profit be?
Answer:
a. MR= delta TR/ delta Q= delta TR/10 000
b. Profits are maximized at a price of $16 and quantity of 50,000. At that point profit is
$550,000.
Question 6: A monopolist have a total cost function TC = 0.5Q^2+30Q+60 and the demand
curve P=100-2Q
 a. What is the marginal revenue function? What is the fixed cost?
b. What are the quantity and price that the monopolist maximize its profit? Compute
this profits
Question 7: Suppose that the market for green tea can be described by the following demand
and supply curves (prices are per kg)
Qd = 260 – 5P
Qs = 8P
Find the market equilibrium in the absence of taxes. Draw the demand and supply curves.
Labelling all intercepts and the market equilibrium?
Draw the curves as in the last item, showing clearly the areas representing the consumer surplus
(CS) and the producer surplus (PS). Calculate their values and the value of total surplus?
 C I G NX
Households spent 10,000 hours taking care of
children. Of these, 8000 hours are parents taking
20000
care of their own children, and 2000 hours are
spent on outside childcare
Workers spend 12,000 hours on cleaning. Of
these, 7000 hours cleaning their own houses,
20000
2000 hours cleaning other people’s homes, 3000
hours cleaning businesses
Businesses hire 4000 hours of telephone
technical support. Of these, 3000 hours are by
10000
domestic firms and 1000 hours are by foreign
firms
Domestic businesses spend 1,000 hours on
imported asparagus. They sell the asparagus to 25000 -10000
households for $25,000
The government collects $50,000 in taxes. Of
this, $40,000 is spent on food stamp programs 10000
and $10,000 is used to pay tax collectors
Firms import $10,000 of copper. They use half
to make electronics, which they sell to the
5000 20000 -10000
government for $20,000, and the other half is
stored for next year
Question 8: For each, indicate the dollar value that each contributes to each component of
GDP. Assume that everyone in society gets page a wage of $10 per hour for their market
labour. If an item does not contribute to GDP, write “none”

Question 9:

Year Price of corn Quantity of corn Price of candy Quantity of candy

1 $0.50 10 $1.00 10
2 $1.00 15 $2.00 12
3 $1.50 20 $3.00 15

Assume the base year is year 1. Calculate the followings

a. Nominal and real GDP for three years
b. GDP deflator for three years
c. CPI for three years
d. The growth rate and inflation for the period year 2- year 3

Question 10: Consider the following data on US GDP

Year Nominal GDP GDP deflator
 (in billions of dollars) (base year 2009)
2014 17419 108.3
1994 7309 73.8

a. What was the growth rate of nominal GDP between 1994 and 2014?
b. What was the growth rate of the GDP deflator between 1994 and 2014?
c. What was real GDP in 1994 measured in 2009 prices?
d. What was real GDP in 2014 measured in 2014 prices?
e. What was the growth rate of real GDP between 1994 and 2014?
f. Was the growth rate of nominal GDP higher or lower than the growth rate of real
GDP? Explain.