hw1..doc
Instructions: Please answer ALL of the Questions from 1 to13 Below. For questions requiring computations, please show your work completely to get full credit. You may work alone or in groups. If you work in groups, please state the name(s) of your classmate. You must submit your paper individually. No “group” paper accepted. You may send your completed answers electronically or bring them to class. This assignment is due at 6pm on 2/15. No Extra Credit will be accepted if late by one class. Good Luck!
1. Economics is the study of how fairly goods and services are distributed within society. (True or False) (1 pt)
2. Draw a production possibilities frontier showing increasing opportunity cost for hammers in terms of Horseshoes (i.e. Place Horseshoes on the XAxis). (4 points total)
a. On the graph, identify the area of feasible outcomes and the area of infeasible outcomes.
b. On the graph, label a point that is efficient as point "E" and a point that is inefficient as point "I".
c. On the graph, illustrate the effect of the discovery of a new vein of iron ore, a resource needed to make both horseshoes and hammers, on this economy.
d.On a second graph, illustrate the effect of a new computerized assembly line in the production of hammers on this economy.
3. a. What is the difference between a "change in supply" and a "change in quantity supplied?" Graph your answer. (2 points)
b. For each of the following changes to the market for cranapple juice, determine whether there will
be a change in quantity supplied or a change in supply. (1 point each for a total of 4 points)
i. 
a change in input costs


ii 
a change in producer expectations 

iii. 
a change in price of cranapple juice


iv. 
a change in technology 
4.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. (Please sketch one graph for each scenario a through jUse Back side or another sheet of paper as needed) (10 points total, 1 for each graph)
a. Winter starts and the weather turns sharply colder.
b. The price of tea, a substitute for hot chocolate, falls.
c. The price of cocoa beans decreases.
d. The price of whipped cream falls.
e. A better method of harvesting cocoa beans is introduced.
f. The Surgeon General of the U.S. announces that hot chocolate cures acne.
g. Protesting farmers dump millions of gallons of milk, causing the price of milk to rise.
h. Consumer income falls because of a recession and hot chocolate is considered a normal good.
i. Producers expect the price of hot chocolate to increase next month.
j. Currently, the price of hot chocolate is $0.50 per cup above equilibrium.
5. Fill in the accompanying table, showing whether equilibrium price and equilibrium quantity go up, down or stay the same. (2 points for each cell for a total of 18 points)
No Change in Supply 
An Increase in Supply 
A Decrease in Supply 

No Change in Demand 



An Increase in Demand 



A Decrease in Demand 



6. If marijuana were legalized, it is likely that there would be an increase in the supply of marijuana. Advocates of marijuana legalization argue that this would significantly reduce the amount of revenue going to the criminal organizations that currently supply marijuana. These advocates believe that the (1 pt)
a.supply for marijuana is elastic.
b.demand for marijuana is elastic.
c.supply for marijuana is inelastic.
d.demand for marijuana is inelastic.
7. The demand for gasoline will respond more to a change in price over a period of five weeks than over a period of five years. (True or False) (1 pt)
8. You own a small town movie theatre. You currently charge $5 per ticket for everyone who comes to your movies. Your friend who took an economics course in college tells you that there may be a way to increase your total revenue. Given the demand curves shown, answer the following questions. (10 points total)
a. What is your current total revenue for both groups? (2 points)
b.The elasticity of demand is more elastic in which market? (1 point)
c.Which market has the more inelastic demand? (1 point)
d.What is the elasticity of demand between the prices of $5 and $2 in the adult market? Is this elastic or inelastic? (2 points)
e.What is the elasticity of demand between $5 and $3 in the children's market? Is this elastic or inelastic? (2 points)
f.Given the graphs and what your friend knows about economics, he recommends you increase the price of adult tickets to $8 each and lower the price of a child's ticket to $3. How much could you increase total revenue if you take his advice? (2 points)
9. State the determinants of the Price Elasticity of Supply and give an example (2 points for each determinant for a total of 4 points)
10. Answer each of the following questions about demand and consumer surplus. (8 points total)
a.What is consumer surplus, and how is it measured? (2 points)
b.What is the relationship between the demand curve and the willingness to pay? (1 point)
c.Other things equal, what happens to consumer surplus if the price of a good falls? Why? Illustrate using a demand curve. (3 points)
d.In what way does the demand curve represent the benefit consumers receive from participating in a market? In addition to the demand curve, what else must be considered to determine consumer surplus? (2 points)
11. Cops love donuts. The table shown reflects the value the cops place on each donut they eat: (8 points total)
VALUE OF FIRST DONUT 
$0.60 
VALUE OF SECOND DONUT 
$0.50 
VALUE OF THIRD DONUT 
$0.40 
VALUE OF FOURTH DONUT 
$0.30 
VALUE OF FIFTH DONUT 
$0.20 
VALUE OF SIXTH DONUT 
$0.10 
a. Use this information to construct the cops’s demand curve for donuts. (2 points)
b.If the price of donuts is $0.20, how many donuts will cops buy? (1 point)
c.Show cops’s consumer surplus on your graph. How much consumer surplus would they have at a price of $0.20? (2 points)
d. If the price of donuts rose to $0.40, how many donuts would they purchase now? What would happen to the cops's consumer surplus? Show this change on your graph.
(3 points)
12. Which of the following statements is correct regarding the imposition of a tax on gasoline?
(1 point)
a.The incidence of the tax depends upon whether the buyers or the sellers are required to remit tax payments to the government.
b.The incidence of the tax depends upon the price elasticities of demand and supply.
c.The amount of tax revenue raised by the tax depends upon whether the buyers or the sellers are required to remit tax payments to the government.
d.The amount of tax revenue raised by the tax does not depend upon the amount of the tax per unit.
13. Using the graph shown, determine the numerical value of each of the following: (9 points)
a.equilibrium price before the tax
b.consumer surplus before the tax
c.producer surplus before the tax
d.total surplus before the tax
e.consumer surplus after the tax
f.producer surplus after the tax
g.total tax revenue to the government
h.total surplus (consumer surplus + producer surplus + tax revenue) after the tax
i.deadweight loss
PART B. EXTRA CREDIT. You are not obligated to do this section. To obtain full extra credit, you must show all of your work for problems requiring calculations.
EC1. Suppose there are 8,000 identical individuals in a market for Latin dance videos, each with a demand function represented by Qdx=12 – 2Px , and 400 identical producers of Latin dance videos, each with a supply function represented by Qsx=10Px . (18 Points Maximum for Parts ad)
a. Find the market demand and market supply function for Latin Dance Videos. ( 2 points)
b. Using algebra, obtain the market equilibrium price and equilibrium quantity for Latin dance videos. (4 points) (use additional sheets of paper as necessary)
c. Derive the market demand and market supply schedule for dance videos at prices ranging from $1 to $6 and sketch the market demand and market supply curves and label the equilibrium price and quantity. (4 points) (use additional sheets of paper as necessary)
d. Use the Demand equation to find the price elasticity of demand. Is the price elasticity demand elastic or inelastic? (4 Points)
e. Interpret the elasticity of demand and state by how much quantity in demand would fall if price for dance videos would increase by 2% (2 Points)
EC2. Suppose the market for fine dining in Los Angeles is described by the following supply and demand equations:
Qs = 3P
Qd = 400 – P
Suppose a Tax of T is placed on restaurant goers, so the new demand equation is
Qd=400(P + T)
solve for the equilibriumand state (1) the price received by restaurant owners, (2) the price paid by restaurant goers, and (3) the quantity of restaurant meals sold. (6 Points)