Homework 2

1. Table 1
Price Quantity Demanded Quantity Demanded Quantity Demanded
by Michelle by Laura by Hillary
$5 5 4 11
$4 6 6 13
$3 7 8 15
$2 8 10 17
$1 9 12 19
$0 10 14 21

If the market consists of Michelle, Laura, and Hillary and the price falls by $1, the quantity demanded in the market
increases by:
If the market consists of Michelle and Laura only and the price falls by $1, the quantity demanded in the market increases
by:
If the market consists of Michelle and Hillary only and the price falls by $1, the quantity demanded in the market
increases by:
If the market consists of Laura and Hillary only and the price falls by $1, the quantity demanded in the market increases
by:

2. Figure 1
Price

Supply A Supply B Supply C

Quantity

Which of the following would cause the supply curve to shift from Supply A to Supply C in the market for tennis
racquets?
a. an increase in the price of tennis balls
b. an expectation by firms that the price of tennis racquets will increase in the very near
future
c. a decrease in the price of tennis racquet strings
d. a decrease in the number of firms selling tennis racquets

Which of the following would cause the supply curve to shift from Supply A to Supply C in the market for winter coats?
a. an increase in the price of winter coats
b. a decrease in the number of firms selling winter coats
c. a decrease in the price of zippers and snaps
d. a decrease in the price of winter hats and gloves

Which of the following would cause the supply curve to shift from Supply B to Supply A in the market for tennis
racquets?
 a. a decrease in the price of tennis balls
b. an expectation by firms that the price of tennis racquets will increase in the very near
future
c. a decrease in the price of tennis racquet strings
d. an improvement in technology that allows firms to use less labor in the production of
tennis racquets

Which of the following would cause the supply curve to shift from Supply B to Supply A in the market for disposable
ballpoint pens?
a. a decrease in the price of disposable ballpoint pens
b. an increase in the price of fountain pens
c. an increase in the price of ink
d. an improvement in technology that allows firms to use less labor in the production of
disposable ballpoint pens

3. Table 2
An Increase in Supply A Decrease in Supply
An Increase in Demand A B
A Decrease in Demand C D

Which combination would produce an increase in equilibrium quantity and an indeterminate change in equilibrium
price?
Which combination would produce an increase in equilibrium price and an indeterminate change in equilibrium
quantity?
Which combination would produce a decrease in equilibrium price and an indeterminate change in equilibrium
quantity?
Which combination would produce a decrease in equilibrium quantity and an indeterminate change in equilibrium
price?

4. Table 3
A country club usually only allows members to purchase tickets for its celebrity golf tournament, but the club is
considering allowing non-members to purchase tickets this year. The demand and supply schedules are as follows:
Price Quantity Demanded Quantity Demanded Quantity Supplied
by Members by Non-members
$10 1000 500 600
$15 800 400 600
$20 600 300 600
$25 400 200 600
$30 200 100 600

If only members are allowed to purchase tickets to this year's celebrity golf tournament, then what will be the equilibrium
price?
If both members and non-members are allowed to purchase tickets to this year's celebrity golf tournament, then what will
be the equilibrium price?
If both members and non-members are allowed to purchase tickets to this year's celebrity golf tournament and the
country club sets the ticket price at $30, then there will be
a. a shortage of 300 tickets.
b. a surplus of 300 tickets.
c. 600 tickets sold.
d. 600 tickets unsold.
If both members and non-members are allowed to purchase tickets to this year's celebrity golf tournament and the
country club sets the ticket price at $20, then there will be
a. a shortage of 300 tickets.
b. a surplus of 300 tickets.
c. 300 tickets sold.
d. 600 tickets unsold.

5. Table 4
The demand schedule below pertains to sandwiches demanded per week.
Price Harrys Darbys Jakes
Quantity Quantity Quantity
Demanded Demanded Demanded
$3 3 4 3
$5 1 2 x
Regarding Harry and Darby, whose demand for sandwiches conforms to the law of demand?
Regarding Harry and Darby, for whom are sandwiches a normal good?
Suppose x = 1. Then it must be true that
a. Harry and Jake have the same income, which is lower than Darbys income.
b. if sandwiches and potato chips are complements for Harry, then those two goods are also
complements for Jake.
c. Harrys demand curve is identical to Jakes demand curve.
d. All of the above are correct.
Suppose x = 1. Then the slope of the market demand curve is
a. -3.
b. -1/3.
c. 1/3.
d. 3.
Suppose Harry, Darby, and Jake are the only demanders of sandwiches. Also suppose x = 2. Then
a. the slope of Jakes demand curve is -1/2, and the slope of the market demand curve is -5/2.
b. the slope of Jakes demand curve is -1/2, and the slope of the market demand curve is -2/5.
c. the slope of Jakes demand curve is -2, and the slope of the market demand curve is -5/2.
d. the slope of Jakes demand curve is -2, and the slope of the market demand curve is -2/5.
Suppose Harry, Darby, and Jake are the only demanders of sandwiches and that the market demand violates the law of
demand. Then, in the table, the value of x must be:
Suppose Harry, Darby, and Jake are the only demanders of sandwiches. Also suppose the following:
x = 2.
The current price of a sandwich is $5.00.
The market quantity supplied of sandwiches is 10.
The law of supply applies to the supply of sandwiches.
Then there is a
a. shortage of 5 sandwiches, and the price would be expected to rise from its current level of
$5.00.
b. shortage of 5 sandwiches, and the price would be expected to fall from its current level of
$5.00.
c. surplus of 5 sandwiches, and the price would be expected to rise from its current level of
$5.00.
d. surplus of 5 sandwiches, and the price would be expected to fall from its current level of
$5.00.
Suppose Harry, Darby, and Jake are the only demanders of sandwiches. Also suppose the following:
x = 2.
The current price of a sandwich is $3.00.
The market quantity supplied of sandwiches is 4.
 The slope of the supply curve is 2.
Then there is currently a
a. shortage of 6 sandwiches, and the equilibrium price of a sandwich is less than $3.00.
b. shortage of 6 sandwiches, and the equilibrium price of a sandwich is $5.00.
c. surplus of 6 sandwiches, and the equilibrium price of a sandwich is less than $3.00.
d. surplus of 6 sandwiches, and the equilibrium price of a sandwich is $5.00.
Suppose Harry, Darby, and Jake are the only demanders of sandwiches. Also suppose the following:
x = 2.
The current price of a sandwich is $3.00.
The market quantity supplied of sandwiches is 5.
The slope of the supply curve is 1.
Then there is currently a
a. shortage of 5 sandwiches, and the equilibrium price of a sandwich is between $3.00 and
$5.00.
b. shortage of 5 sandwiches, and the equilibrium price of a sandwich is $5.00.
c. surplus of 5 sandwiches, and the equilibrium price of a sandwich is between $3.00 and
$5.00.
d. surplus of 5 sandwiches, and the equilibrium price of a sandwich is $5.00.

6. New cars are normal goods. What will happen to the equilibrium price of new cars if the price of gasoline rises,
the price of steel falls, public transportation becomes cheaper and more comfortable, auto-workers accept lower
wages, and automobile insurance becomes more expensive?
a. Price will rise.
b. Price will fall.
c. Price will stay exactly the same.
d. The price change will be ambiguous.

7. Figure 2
The diagram below pertains to the demand for turkey in the United States.
price

DA

DB
quantity

All else equal, an increase in the income of buyers who consider turkey to be an inferior good would cause a move from:
All else equal, a sale on chicken would cause a move from:
All else equal, the approach of Thanksgiving would cause a move from:
All else equal, buyers expecting turkey to be more expensive in the future would cause a current move from:
All else equal, a large number of people becoming vegetarians would cause a move from:
All else equal, the premature deaths of thousands of turkeys would cause a move from:
All else equal, an increase in the productivity of turkey farmers would cause a move from:
All else equal, a decrease in the price of the grain fed to turkeys would cause a move from:
All else equal, sellers expecting the price of turkey to rise in the future would cause a current move from:
8. Consider the following pairs of goods. For which of the two goods would you expect the demand to be more
price elastic? Why?
a. water or diamonds
b. insulin or nasal decongestant spray
c. food in general or breakfast cereal
d. gasoline over the course of a week or gasoline over the course of a year
e. personal computers or IBM personal computers
9. 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.

Price
10

2 Adult Demand
1

10 20 30 40 50 60 70 80 90 100 Quantity

Price
10

2 Child Demand
1

5 10 15 20 25 30 35 40 45 50 55 60 65 70 Quantity

a. What is your current total revenue for both groups?

b. The elasticity of demand is more elastic in which market?
c. Which market has the more inelastic demand?
d. What is the elasticity of demand between the prices of $5 and $2 in the adult market? Is
this elastic or inelastic?
e. What is the elasticity of demand between $5 and $2 in the children's market? Is this
elastic or inelastic?
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?
 10. When the Shaffers had a monthly income of $4,000, they usually ate out 8 times a month. Now that the couple
makes $4,500 a month, they eat out 10 times a month. Compute the couple's income elasticity of demand. Explain
your answer. Is a restaurant meal a normal or inferior good to the couple?

Figure 1
In each case, the budget constraint moves from BC-1 to BC-2.
y y y
8 8 8

7 (a) 7 (b) 7 (c)

6 6 6
BC-1
5 5 5

4 4 4

3 3 3
BC-2
2 2 2

1 1 1
BC-2 BC-1 BC-1 BC-2

1 2 3 4 5 6 7 8 x 1 2 3 4 5 6 7 8 x 1 2 3 4 5 6 7 8 x

y
8

7 (d)
6
BC-2
5

3
BC-1
2

1 2 3 4 5 6 7 8 x

Which of the graphs in the figure could reflect a simultaneous increase in the price of good X and decrease in the price of
good Y?Which of the graphs in the figure could reflect an increase in income?
Which of the graphs in the figure could reflect a decrease in income?

Figure 2
(a) (b)
y y
40

14

10 x 42 x
In graph (a), if income is equal to $120, the price of good X is:
In graph (a), if income is equal to $120, the price of good Y is:
In graph (a), what is the price of good X relative to good Y (i.e., P X/PY)?
In graph (a), what is the price of good Y relative to good X (i.e., P y/Px)?
In graph (b), if income is equal to $420, the price of good X is:
In graph (b), if income is equal to $420, the price of good Y is:
In graph (b), what is the price of good X relative to good Y (i.e., P x/Py)?
In graph (b), what is the price of good Y relative to good X (i.e., P Y/PX)?
Assume that a consumer faces the budget constraint shown in graph (a) in January and the budget constraint shown in
graph (b) in February. If the consumers income has remained constant, what has happened to prices between
January and February?
a. The price of X has fallen, but there could not have been a change in the price of Y.
b. The price of Y has fallen, but there could not have been a change in the price of X.
c. The price of X has fallen, and the price of Y has risen.
d. The price of Y has fallen, and the price of X has risen.

Figure 3
y

13
A
12

11

10

5
B
4
C
3

2
D
1

1 2 3 4 5 6 7 8 9 10 11 12 13 14 x

The graph illustrates:

What is the consumers marginal rate of substitution?
What is the consumers marginal rate of substitution as she moves from A to B?
What is the consumers marginal rate of substitution as she moves from B to C?
As the consumer moves from point A to B to C to D, the consumers marginal rate of substitution
a. remains constant.
b. increases.
c. decreases.
d. first increases, then decreases.
As the consumer moves from point A to B to C to D, the consumers total utility
a. remains constant.
b. increases.
c. decreases.
d. first increases, then decreases.
Figure 4
Cookies

V X

Z Y

T Indifference Curve B
Indifference Curve A

Iced tea

Which of the following statements is not correct?

a. The consumer prefers bundle Y to bundle Z.
b. The consumer is indifference between bundle W and bundle X.
c. The consumer is indifference between bundle X and bundle V.
d. The consumer prefers bundle X to bundle Z.
Which of the following statements is correct?
a. The consumer prefers bundle Y to bundle Z.
b. The consumer is indifference between bundle X and bundle V.
c. The consumer prefers bundle Y to bundle X.
d. The consumer prefers bundle Z to bundle V.
The marginal rate of substitution between bundles V and Z is
a. greater than the marginal rate of substitution between bundles Z and T.
b. less than the marginal rate of substitution between bundles Z and T.
c. equal to the marginal rate of substitution between bundles Z and T.
d. We are unable to compare the marginal rates of substitution.
If the consumer moves from bundle V to bundle X, the
a. marginal rate of substitution remains constant.
b. total utility remains constant.
c. total utility increases.
d. Both a) and b) are correct.
If the consumer moves from bundle W to bundle Z, the
a. marginal rate of substitution remains constant.
b. total utility remains constant.
c. total utility decreases.
d. Both a) and b) are correct.
Figure 5
The following graph illustrates a representative consumers preferences for marshmallows and chocolate chip
cookies:

Assume that the consumer has an income of $40, the price of a bag of marshmallows is $2, and the price of a bag of
chocolate chips is $2. The optimizing consumer will choose to purchase which bundle of marshmallows and chocolate
chips?
Assume that the consumer has an income of $100 and currently optimizes at bundle A. When the price of marshmallows
decreases to $5, which bundle will the optimizing consumer choose?
Assume that the consumer has an income of $40. If the price of chocolate chips is $4 and the price of marshmallows is $4,
the optimizing consumer would choose to purchase:
Assume that the consumer has an income of $80. If the price of chocolate chips is $4 and the price of marshmallows is $4,
the optimizing consumer would choose to purchase:
Assume that the consumer has an income of $40. Based on the information available in the graph, which of the following
price-quantity combinations would be on her demand curve for marshmallows if the price of chocolate chips were $4?
a. P=$2, Q=3
b. P=$2, Q=9
c. P=$4, Q=3
d. P=$4, Q=9
Assume that the consumer depicted the figure has an income of $50. Based on the information available in the graph,
which of the following price-quantity combinations would be on her demand curve for chocolate chips if the price of
marshmallows is $2.50?
a. P=$2.50, Q=6
b. P=$2.50, Q=10
c. P=$5.00, Q=3
d. P=$5.00, Q=5
Answer the following questions based on the table. A consumer is able to consume the following bundles of rice and
beans when the price of rice is $2 and the price of beans is $3.
RICE BEANS
12 0
6 4
0 8
a. How much is this consumer's income?
b. Draw a budget constraint given this information. Label it B.
c. Construct a new budget constraint showing the change if the price of rice falls $1. Label this C.
d. Given the original prices for rice ($2) and beans ($3), construct a new budget constraint if this
consumer's income increased to $48. Label this D.