Problem Assignments and Readings

Economics 201
Professor R. Fisher
FALL 1998
Ronald C. Fisher, 1998

These assignments are due in class on the day assigned according to the class schedule. They will
be collected and graded on a credit (4 points) -no credit (0 points) basis. The grade depends only
on whether you turned the assignment in on time and whether you made a sincere effort to answer
the questions. Assignments turned in late will not receive credit. Regardless of the format of the
problem, you should always show how you arrived at your answer and include substantial
explanation. It is not sufficient merely to state an answer ("12" or "B").

Fall 1998

ECONOMICS 201
Assignment No. 1
Due: September 10

R. Fisher

1.

Colander, Chapter 3, Problem #2.

2.

Colander, Chapter 3, Problem #4.

3.

When the price of a commodity like coffee increases, some consumers usually come up with
the idea of a buyer's strike. That is, they propose to buy no coffee in order to drive the price
down.
a.
If the strike is successful, who gains?
b.
What gain goes to those who boycott?
c.
Would you join or only advise others to join the boycotts?
d.
What do you think will happen to the price of tea during the
boycotts? Explain all answers.

4.

The Wall Street Journal reported that in 1985 good deals were available in the fall on used
cars because the automobile manufacturers offered summer sales incentives on new cars that
left dealers with a gut of trade-ins. Since the incentives began, used car prices fell 12.5%.
During the same period in the previous year, when there were no new car sales incentives,
and car prices fell only 3.2%. The new car incentives included rebates and low-interest
loans. Record numbers of new cars were sold in August and September, and many buyers
traded in used cars. And some buyers who might have purchased late-model used cars
switched to new cars because of the incentives. Draw separate supply and demand diagrams
for "new cars" and "used cars" and show the changes described. Are new and used cars
substitutes or complements? Why?

5.

Copeland, Workbook, Chapter 4, Problem #7.

Fall 1998

Economics 201
Assignment No. 2
Due: September 17

1.

Colander, Chapter 8, Problem #1.

2.

Read the following excerpt and then answer the three questions.

R. Fisher

As a result of an increase in public transit fares in New York, the New York Times reported:
"Comparing September, 1975, and September, 1974, the M.T.A. (Metropolitan
Transit Authority) reported these changes on its transit and commuter facilities:
Bus ridership declined 12.7 percent to 46.2 million from 53.0 million . . .
Subway ridership declined 5.2 percent to 79.3 million from 83.65 million . . . .
The increase in the transit fare from 35 to 50 cents produced a 33.5 percent gain in
subway revenue in September compared with a year ago . . . and an 18.4 percent
increase in bus revenue . . ."
I.

Comparing 1974 to 1974 and assuming that only price changed over this period, the
demand for bus transportation in New York is
A.
Elastic because ridership fell in response to the price increase
B.
Perfectly inelastic, because bus riders have no other alternative than to ride
the bus
C.
Inelastic, because bus revenue increased as a result of the fare increase
D.
2.6

II.

Again comparing 1975 to 1974 and assuming no other changes, a comparison of the
demand for buses and subways shows that
A.
The demand for subway rides is relatively more price inelastic than the
demand for bus rides
B.
Both the demand for bus and subway rides is price elastic
C.
Subway riders are more sensitive to fare changes than bus riders
D.
The demand for bus rides is relatively less price elastic than the demand for
subway rides

III.

3.

Among the possible explanations for this behavior, which of the following would be
consistent with the observations?
A.
Bus riders tend to be poorer, on average, than subway riders.
B.
Commuters comprise a larger share of subway than bus riders, while buses
have more shoppers
C.
The average length of a bus ride tends to be very much shorter than the
average subway trip
D.
All of the above
E.
None of the above

In April 1995 it was reported that:

Copper prices continued their slide on signs that demand might be
weakening. Copper for May delivery fell 3.4 cents, to $1.2825 a pound, its lowest
price since March 15. A report to be released on factory orders for durable goods
like automobiles and kitchen appliances, which typically use large amounts of
copper, is expected to show a decline. The slow down in the USA is taking hold in
both housing and automobiles.
On other commodity markets, crude oil prices fell as repairs to a broken
pipeline in the North Sea proceeded faster than expected. Crude oil for June deliver
fell 29 cents, to $20.12 a barrel. May unleaded gasoline fell 0.99 cents, to 61.21
cents a gallon.
a.

Assuming that the markets for both copper and oil are competitive, use supply and
demand analysis to show and explain i ) the relationship between the markets for
cars/houses and the market for copper and ii) why copper prices have declined.

b.

Similarly, use supply and demand analysis to show and explain i) why crude oil
prices declined and ii) the relationship between the markets for crude oil and
unleaded gasoline.

c.

Suppose it is also known that the broken North Sea pipeline had been expected to
reduce crude oil output by .5 percent. Given the observed oil price change, calculate
an estimate of the short run price elasticity of demand for crude oil.

4.

Read the following information and then answer the true/false questions.
Maple Syrup prices soared for a second year.
A combination of warm weather and maple-tree dieoff from acid rain again reduced the syrup supply.
One farms output fell to only 1,200 gallons this year,
compared with a normal 4,200. Anothers fell only
30% to 5,000 gallons.
A gallon of syrup sells for $35 at one outlet in
Massachusetts, up from $25 a year ago. Some
producers charge more. One concern is that the
higher prices will scare off food processors and
consumers. But one producer noted that "It's a
unique product and demand remains firm."

TRUE OR FALSE?

5.

1.

As a result of the decrease in supply of maple syrup, demand is expected to decrease

also.

2.

According to the article, the producers believe that the demand for maple syrup is
price inelastic.

3.

If demand is price inelastic, then the reduction in syrup supply will reduce revenue to
syrup producers.

4.

If new firms enter the maple syrup industry as a result of the current high prices,
then prices should be significantly lower next year.

Colander, Chapter 7, Problem #6.

Fall 1998

Economics 201
Assignment No. 3
Due: October 1

R. Fisher

1.

Colander, Chapter 9, Problem #3.

2.

Colander, Chapter 10, Problem #3.

3.

Colander, Chapter 10, Problem #4.

4.

Colander, Chapter 11, Problem #2.

5.

Suppose that the demand for cigarettes is very price inelastic (though not perfectly) and that
the supply is very elastic (though not perfectly) and that cigarettes are sold in a competitive
market. Now suppose that the State of Michigan levies a new tax of $1.00 per pack on
cigarettes. Analyze the effects of this tax and answer each of the following questions.
I.

As a result of the tax, the price of cigarettes in Michigan will

A.
not change.
B.
increase by less than $1.00
C.
increase by $1.00
D.
decrease by $1.00

II.

As a result of the tax, the quantity of cigarettes sold in Michigan will

A.
not change.
B.
decrease by a relatively small amount.
C.
decrease by a relatively large amount.
D.
increase.

III.

Which of the following best characterizes the likely opinions about the tax?
A.
Sellers of cigarettes will be most opposed to the tax because of the large
decrease in their sales.
B.
Consumers won't care mush about the tax because they will pay most any
price for cigarettes.
C.
Consumers will be more opposed to the tax than sellers because consumers
will pay most of the tax.
D.
Sellers will not care about the tax at all because all of it is passed on to
consumers.

IV.

As a result of the tax, which of the following is a likely response?

A.
Smokers reducing their use of cigarettes slightly.
B.
An increase in the sale of cigarettes in Ohio and Indiana.
C.
An increase in consumption of cigars, pipes, and chewing tobacco.
D.
All of the above.
E.
None of the above

Fall 1998

Economics 201
Assignment No. 4
Due: October 8

R. Fisher

1.

Colander, Chapter 11, Problem #1.

2.

Copeland, Workbook, Chapter 10, Brain Teaser #2.

3.

Suppose a hypothetical competitive firm has the following short-run cost curves. Fill in the
blanks.

Output

Marginal
Cost

Average
Cost

Average
Variable
Cost

0
30
50
60
80
100
125
160
200
222

$2.00
1.60
1.35
1.20
1.60
2.00
2.50
3.20
4.00
4.45

$---3.13
2.50
2.27
2.05
2.00
2.05
2.25
2.50
2.68

$2.00
1.80
1.70
1.60
1.55
1.60
1.73
2.00
2.30
2.50

Total
Cost

Variable
Cost

What is the fixed cost?

If the market price is:
Then the profit-maximizing output is:
For this output compute
the following:
Total Revenue
Total Cost
Total Profit (or Loss)
Marginal Revenue
Marginal Cost

$2.50

$2.00

$1.60

$1.20

Suppose the industry consists of 100 firms with the same cost curves. Fill in the supply schedule:
Price
$2.50
2.00
1.60
1.20

Firm
Supply

Market
Supply

Market
Demand
3500
6000
8000
10000

In the short-run what is the equilibrium price?

In the short-run what is the equilibrium quantity?
Will firms enter or leave this industry?
Suppose all firms keep this scale of operation, and it is a constant cost industry.
What is the long-run equilibrium price?
What is the long-run equilibrium quantity?
What is the long-run equilibrium number of firms?
4.

Colander, Chapter 11, Problem #4

Fall 1998

1.

Economics 201
Assignment No. 5
Due: October 22

R. Fisher

The first diagram below shows the current market demand curve (Do), long-run supply
curve (LRS) and short-run supply curve (So) for a perfectly competitive industry. The
second diagram shows the current short-run and long-run cost curves of a typical firm in this
industry. The current price is Po.
S
LRS

SRMC
SRAC

LRAC

D1
D

I.

Suppose that demand rises to D1. Which statement best characterizes the short-run effect of
that change in the market?
a.
Price rises, so consumers buy less of this product, requiring fewer firms.
b.
Price rises above average cost, so new firms enter this industry.
c.
Price rises and each existing firm in the industry produces more output.
d.
A shortage results, because more is demanded but firms cannot produce
more in the short run.
II.

Given the long-run supply curve and long-run cost curve in this industry, it is clear
that
a.
this is a constant cost industry
b.
production technology in this industry exhibits constant returns to scale.
c.
the prices of inputs for this industry remain constant.
d.
entry of new firms into the industry causes an increase in cost for all firms in
the market.

III.

As a result of the increase in demand for this product, in the long-run

a.
New firms will enter this industry because profits have become positive.
b.
Some firms will leave this industry, because now that the existing firms are
bigger, fewer are needed.
c.
There will be only one firm left in the industry, because it is a decreasing cost
industry.
d.
None of the above will happen.

IV.

Once a new long run equilibrium is reached in this industry after demand has risen,
which statement best characterizes the new conditions in the market?
a.
Price returns to Po, so that profits will again be zero.
b.
Price stays above Po due to higher cost, but consumers purchase a greater
amount of the product than previously.
c.
Price increases above that which prevailed or the new short run equilibrium.

d.
V.

2.

Price falls below Po and thus consumers buy more of this product.

Suppose that after demand increased, the government imposed a price ceiling (a
maximum price) equal to Po. The effect in the market would be
a.
that none of this product would be produced, because costs would not be
covered.
b.
that surplus would result, because the price induces more supply.
c.
that a shortage would result, because the price ceiling eliminates the
incentive for entry of new firms.
d.
nothing, because a price of Po is the long run equilibrium price anyway.

The Wall Street Journal reported the following information in 1995:

The cost of newsprint, which typically accounts for 20% of a newspapers annual
budget, was increasing substantially. Newsprint prices were already up 20% from a year
ago; a new round of increases was expected to bring the annual rise to 40%.
In response, newspapers were changing operations, including cutting staffs. They
passed along costs to readers via higher subscription rates and newsstand prices. Also being
sacrificed were the community listings that were considered a public service, but take up
valuable newsprint. Several papers trimmed news space. Throughout the late 1980s and
early 1990s, publishers paid extremely low prices for newsprint, as a depressed advertising
market kept newspapers thin and demand for paper slack. The $7.5 billion North American
mills were running at or near capacity of about 16 million metric tons. Now the situation
has changed. As it takes three years to build a mill, capacity cannot expand until the late
1990s.

3.

a.

Draw diagrams for the newsprint market and the cost-structure of a typical firm in
that market. Indicate sample price/quantity combinations representative both of the
early 1990s and the current situation. Explain why newsprint prices have increased
recently.

b.

The increase in newsprint prices has changed both the quantity and price of
newspapers (or newspaper service). Use market and firm diagrams for the
newspaper industry to explain why and how prices and quantities changed as a result
of the newsprint market effects.

c.

Explain what is likely to happen in both the newsprint industry and the newspaper
industry over the next 3 to 5 years (the long run).

A newspaper in Australia reported the following about the office building market in Perth in
1992.
The recent completion of a 64,000 sq. m office building had raised
Perths office vacancy rate to 33 percent. Perth had one of the highest
CBD oversupplies of office space for major cities. Construction of new
office facilities began in the part of time when many expected the
economy to keep growing. In 1988-89, it was almost impossible to find
a vacant office space. In fact, the economy in Perth and Australia did not

grow and even went into recession. As a result, rents fell by about half
and the value of property in the CBD of Perth also fell.
Explain carefully why the office vacancy rate is so high. Why did CBD property values
plummet in the last year? At the time, some people forecast that the vacancy rate would fall
in the future. Why and how might this occur? Do you think the vacancy rate is likely to go
up again substantially in the future?
4.

Read the attached article entitled "Housing Vacancies Increase" from the State News in
1994.
a.

The article suggests that the rental housing market in East Lansing had become "a
buyer's market". What does this mean? What caused the buyer's market, a change in
demand or supply? Explain.

b.

If the MSU charges were the only effects in this market, what do you expect would
happen to rents? Why? How would it be possible for student enrollment to decline
and rents to increase still? Explain using supply and demand.

c.

The article notes that the MSU residence halls are conducting an advertising
campaign to attract residents and that changes in the residence halls include new
cafeteria hours, ATMs, and new cable TV channels. Are these activities consistent
with your answer to part b?

Fall 1998

1.

Economics 201
Assignment No. 6
Due: November 5

R. Fisher

The nectar industry is perfectly competitive. There is free entry, constant returns for the
industry, and the industry has no influence on factor prices.
A nectar firm discovers a revolutionary new method of production, which features
increasing returns to scale. This new method is patented and no other firms can use it.
Describe the development of the industry after this discovery.

2.

The diagram below shows the demand curve facing the one firm selling cable TV service in
Lansing. Suppose that the constant marginal cost of providing the cable service is $40 per
household per year.
Price
(peryear)

200

100

40
75,000

150,000

CableTVHouseholds

What price should the company charge to maximize profits? How many households would
they serve?
At what quantity and price would the company's sales (revenue) be greatest?
Suppose the city wished to regulate this company. What price might the city impose to
emulate the competitive market result? Are there any potential problems with that
regulation?

3.

Suppose that MSU is the only seller of tickets to the MSU-UM football game to be held in
Spartan Stadium (I.E. MSU has monopoly power). Assume that the total demand for the

game is shown below and that the maximum seating capacity of the stadium is 76,000 (fire
regulations will not allow MSU to sell more tickets than that).
SupplyofSeats
100

Demand

24

76,000

100,000

Tickets

I.

The marginal cost to MSU of selling one more ticket and thus allowing one more
spectator into the stadium is
a.
$24, because that's the price to fill all the seats.
b.
$100, because that's the cost of the first ticket sold.
c.
About zero for the first 76,000 tickets and nearly infinite (in the short run) or
tickets above 76,000
d.
equal to the cost of running the MSU ticket office for football.

II.

Suppose that MSU decides to charge a price for UM tickets separate from all other
games (no season tickets or season tickets with a separate charge for the UM ticket).
In order to maximize profits from ticket sales to the UM game. MSU should charge
a price equal to
a.
$24.
b.
$50.
c.
More that $50 but less than $100.
d.
$100.

III.

Suppose that MSU refuses to set a separate price for UM tickets, but instead
charges $12 for football tickets to all games. As a result of that strategy
a.
the demand for the UM game increases.
b.
88,000 spectators will attend the MSU-UM game in Spartan Stadium.
c.
ticket scalpers will be able to make at least $12 per ticket on the MSU-UM
game.
d.
all of the above.
e.
none of the above.

IV.

Suppose that MSU also knows that the demand for tickets to this game by UM
supporters is less price elastic then the demand by MSU supporters. Accordingly,

MSU decides to sell some tickets through the UM athletic ticket office. In order to
maximize profits, MSU should charge
a.
a lower price for tickets to UM than at MSU, because demand at UM is
lower.
b.
a price equal to $24 at both ticket offices.
c.
a price greater than $50 at UM and lower than $50 at MSU, if the University
believes that UM supporters will not drive to East Lansing to buy tickets.
4.

Colander, Chapter 12, Problem #3.

5.

Colander, Chapter 12, Problem #5.

Fall 1998

Economics 201
Assignment No. 7
Due: November 12

R. Fisher

1.

Colander, Chapter 10, Problem #3.

2.

Colander, Chapter 21, Question for Thought & Review #8 (p. 467).

3.

Suppose that McDonalds hires workers at the minimum wage and that the minimum wage
is increased from $5.50 per hour to $6.50 per hour. Using supply and demand analysis (that
is assuming McDonalds is a competitive firm) what would the ultimate effects of this
change be on:
a.
b.
c.
d.
e.

the amount of labor used by McDonalds.

the demand for McDonalds hamburgers.
the price of McDonalds hamburgers.
the number of McDonalds hamburgers sold.
Does it make any qualitative difference in results if you think McDonalds is a
monopolist?

Explain your answers. Draw diagrams if they help.

4.

Suppose that the market for in-home baby-sitting/child care services in East Lansing is
shown below. Suppose further, child care services are provided by local high school
students, by MSU undergraduate students, and by retired individuals. The service is
demanded by homeowners in East Lansing and graduate students.
Demand

Supply

10

2
ChildcareUnits
(kidhrs)

Current price is $2 per hour per kid.

I.

If MSU decides to expand the undergraduate student population from 30,000 to

40,000 the expected effect on the child care market in East Lansing is
a.
an increase in the price of child care and a corresponding increase in the
number of students supplying the service.
b.
a reduction in the price of child care because of an increase in supply
c.
a surplus of workers resulting from decreased demand for the service
d.
no effect

5.

II.

Suppose that the number of MSU undergraduates remains the same but that the
University takes steps to toughen academic standards (all students must take a
foreign language, calculus, and writing and maintain a 2.5 GPA). The expected
result on the child care market is
a.
The opportunity costs to students of working as baby-sitters increase.
b.
The supply of baby-sitting services in East Lansing decreases.
c.
fewer students will be willing to give up time to baby-sit at any price.
d.
All of the above.

III.

Suppose the East Lansing city government, under pressure from MSU to help
students, decides to impose a minimum wage of $3 per hour per kid for babysitting
in East Lansing. As a result
a.
the number of unemployed students increases.
b.
the price for child care in East Lansing increases.
c.
the total amount of money paid for child care in East Lansing falls if the
demand is price elastic.
d.
all of the above.
e.
none of the above.

IV.

Instead of the minimum wage, suppose that baby-sitters in East Lansing (MSU
students and others) organize and form a union that is effective in controlling the
market (The union might get assistance from the state government on the grounds
that only union members are properly trained). As a result of the union,
a.
the price for child care will be more than $2 if the union wants to maximize
income to workers.
b.
there will be a shortage of child care workers because the union restricts
supply.
c.
the union will charge $10 per hour per kid so that students can earn
satisfactory incomes.
d.
all of the above.
e.
none of the above.

Colander, Chapter 21, Problem #1.

Fall 1998

Economics 201
Assignment No. 8
Due: December 3

1.

Colander, Chapter 22, Problem #2.

2.

Copeland, Workbook, Chapter 22, Problem #2.

3.

Colander, Chapter 17, Problem #1.

5.

Colander, Chapter 18, Problem #2.

5.

Copeland, Workbook, Chapter 18, Problem #2.

R. Fisher

Fall 1998

Economics 201
Assignment No. 9
Due: December 10

R. Fisher

1.

Colander, Chapter 23, Problem #1.

2.

Colander, Chapter 23, Problem #3.

3.

It is common that people will wait in lines, sometimes even overnight or for days, in order to
buy tickets for sporting events or concerts. The State News reported in 1994 that some
MSU students camped out overnight in front of Jenison, as season basketball tickets were to
go on sale the following morning.

4.

a.

Why do people camp out for tickets for sporting events or concerts? What does
this suggest about the price?

b.

Student basketball tickets at Duke University are free and are given out on a firstcome, first-served basis for each game. If Duke decided to sell tickets to students
instead (for money), would students be better off or worse off? How might it
depend on the characteristics of the students?

It is known that all dormitory rooms at MSU are not equally attractive because of difference
in location, size, color, dorm services, student population mix, etc. There is currently no
market for dormitory rooms; rather they are allocated by a process that includes
randomness, seniority, inertia, etc. Essentially, MSU charges the same price for all rooms.
As an alternative, MSU could allocate housing through an auction, selling rooms to the
highest bidder.
Is the current allocation of rooms efficient?
Analyze the bidding operation in terms of supply and demand.
Do you think this bidding system would provide an efficient distribution of dorm rooms?
Other than efficiency, what other factors would make you favor or not favor this system?
If one were concerned that the U would make too much money by this system, what
alternative market system would you suggest that would have similar allocative results?

(For all parts of question #4, argue in terms of economic theory using pareto optimality as the
efficiency criterion.)