PRINCIPLES OF MICROECONOMICS

PRACTICE PROBLEM #1

1. Suppose we are analyzing the market for hot chocolate. Graphically illustrate the impact
each of the following would have on demand or supply. Also show how equilibrium price and
quantity have changed.
a. Winter starts and the weather turns sharply colder. ( Demand increases)
b. The price of tea, a substitute for hot chocolate, falls. (demand falls)
c. The price of cocoa beans decreases. (supply tă ng )
d. The price of whipped cream falls. ( supply tă ng)
e. A better method of harvesting cocoa beans is introduced. ( supply tă ng)
f. The Surgeon General of the U.S. announces that hot chocolate cures acne. ( demand tă ng)
g. Protesting farmers dump millions of gallons of milk, causing the price of milk to rise.( tă ng)
h. Consumer income falls because of a recession and hot chocolate is considered a normal good.
(demand giả m)
i. Producers expect the price of hot chocolate to increase next month. (supply giả m)
j. Currently, the price of hot chocolate is $0.50 per cup above equilibrium. ( demand giả m)

2.
On the graph below, the shift of the supply curve from S1 to S2 represents the imposition of a
tax on a good. On the axes, Q represents the quantity of the good and P represents the price.

1. Consider Figure. Before the tax is imposed,

a. buyers pay $5 per unit.
b. sellers receive $5 per unit.
c. total revenue for sellers amounts to $50.
d. All of the above are correct.

2. Consider Figure . The amount of the tax per unit is

a. $1.50.
b. $2.00.

1
 c. $2.50.
d. $3.00.

3. Consider Figure. From the appearance of the graph, it is apparent that, for every unit of
the good that is sold,
a. sellers are required to send one dollar to the government and buyers are required to send
two dollars to the government.
b. sellers are required to send two dollars to the government and buyers are required to
send one dollar to the government.
c. sellers are required to send three dollars to the government and buyers are required to
send nothing to the government.
d. sellers are required to send nothing to the government and buyers are required to send
two dollars to the government.

4. Consider Figure. As a result of the tax,

a. the price paid by buyers rises from $5 to $7.
b. the price received by sellers (after paying the tax) falls from $5 to $3.
c. the government collects $30 in tax revenue.
d. All of the above are correct.

5. Consider Figure. Which of the following statements correctly characterizes the burden of
the tax?
a. One-fourth of the burden falls on buyers and three-fourths of the burden falls on sellers.
b. One-third of the burden falls on buyers and two-thirds of the burden falls on sellers.
c. One-half of the burden falls on buyers and one-half of the burden falls on sellers.
d. Two-thirds of the burden falls on buyers and one-third of the burden falls on sellers.

6. Consider Figure. Which of these statements about the effects of the tax is correct?
a. The tax is paid by sellers; sellers bear one-half of the burden of the tax; government
collects $24 from the tax.
b. The tax is paid by sellers; sellers bear one-third of the burden of the tax; government
collects $24 from the tax.
c. The tax is paid by sellers; sellers bear two-thirds of the burden of the tax; government
collects $30 from the tax.
d. The tax is paid by buyers; buyers bear two-thirds of the burden of the tax; government
collects $16 from the tax.

7. Consider Figure. Suppose the demand curve is not the one drawn on the graph; instead,
the demand curve is a vertical line passing through the point (Q = 10, P = 5). Using the two
supply curves that are drawn, which of the following statements would describe the effects
of the tax correctly?
a. The price paid by buyers would be $9.
b. The price received by sellers (after paying the tax) would be $6.50.
c. The government would collect $27 from the tax.
d. Buyers of the good would bear 100 percent of the burden of the tax.

3. Answer True/False.

2
 a. When the price of a good is $5, the quantity demanded is 100 units per month; when the
price is $7, the quantity demanded is 80 units per month. Using the midpoint method, the
price elasticity of demand is about 1.50.
b. The equilibrium price of a good is surely increased when its supply and demand are both
increased.
c. Good X and good Y are substitutes. If the price of good Y increases, then the price of good X
will increase.
d. The housing shortages caused by rent controls are larger in the long run than in the short
run because both the supply of housing and the demand for housing are more elastic in the
long run.
e. Rent control may lead to lower rents for those who find housing, but the quality of the
housing may also be lower.
f. A government-imposed tax on a market shrinks the size of the market.
g. A tax on golf clubs will cause buyers of golf clubs to pay a higher price, and the equilibrium
quantity will decrease.
h. If a tax is imposed on the buyers of a product, the tax burden will fall entirely on the buyers.
->F

4. Exercises:

1. Suppose that the market demand and supply for good X is given by
P=50+5Q and P=150-5Q where Q is quantity per year measured in hundreds of bushels
and P is price in dollars per hundred bushels.
a. Find the equilibrium price/quantity combination
b. How much is the price elastic of demand at this equilibrium?
c. How much is the total surplus?
d. Since the federal government place a price ceiling Pc = 70 and does not supply the
shortage. Find the new market price/quantity combination? How much does the total
surplus change?
e. Graph your results

2. Suppose that the market demand for bus rides is given by Q=420-30P and the market
supply of bus rides is given by Q=30P where Q is bus rides per week in thousands and P is
the price per bus ride in dollars.

a. Find the equilibrium price/quantity combination for bus rides.

b. How much is the price elasticity of demand at this equilibrium?
c. Suppose that the state government decides to tax bus rides in an attempt to reduce its
budget deficit. The tax is $2 per bus ride. Find the new equilibrium prices to bus riders and
to bus companies and the new equilibrium quantity.
d. What is total tax payment in dollars to the state government? How much in total dollars is
paid by bus companies?
e. Graph your results