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microeconomics
Microeconomics 4th Edition David Besanko, Ronald Braeutigam - Solutions
*18. Smith cannot tell the difference between rice and wheat and spends all her food budget of $24/wk on these foodstuffs. If rice costs $3/lb, draw Smith’s price-consumption curve for wheat and the corresponding demand curve.
*17. In 2001, X cost $3 and sold 400 units. That same year, a related good Y cost $10 and sold 200 units. In 2002, X still cost $3 but sold only 300 units, while Y rose in price to$12 and sold only 150 units. Other things the same, and assuming that the demand for X is a linear function of the
16. Is the cross-price elasticity of demand positive or negative for the following pairs of items?a. Tennis rackets and tennis ballsb. Peanut butter and jellyc. Hot dogs and hamburgers
15. Draw the Engel curves for the following goods: food, Hawaiian vacations, cashews, Kmart brand sneakers ($4.99/pr).
14. Rank the absolute values of the price elasticities of demand at the points A, B, C, D, and E on the following three demand curves. P2 P P A E B D Q Q Q
13. A hot dog vendor faces a daily demand curve of Q 1800 15P, where P is the price of a hot dog in cents and Q is the number of hot dogs purchased each day.a. If the vendor has been selling 300 hot dogs each day, how much revenue has he been collecting?b. What is the price elasticity of demand
12. What price maximizes total expenditure along the demand curve P 27 Q2?
11. The monthly market demand curve for calculators among engineering students is given by P 100 Q, where P is the price per calculator in dollars and Q is the number of calculators purchased per month. If the price is $30, how much revenue will calculator makers get each month? Find the price
10. Suppose that at a price of $400, 300 tickets are demanded to fly from Ithaca, New York, to Los Angeles, California. Now the price rises to $600, and 280 tickets are demanded.Assuming the demand for tickets is linear, find the price elasticities at the quantity-price pairs (300, 400) and (280,
9. Professors Adams and Brown make up the entire demand side of the market for summer research assistants in the economics department. If Adams’s demand curve is P 50 2QA and Brown’s is P 50 QB, where QA and QB are the hours demanded by Adams and Brown, respectively, what is the market
8. Consumer expenditures on safety are thought to have a positive income elasticity. For example, as incomes rise, people tend to buy safer cars (larger cars with side air bags), they are more likely to fly on trips rather than drive, they are more likely to get regular health tests, and they are
7. Suppose the demand for crossing the Golden Gate Bridge is given by Q 10,000 1000P.a. If the toll (P) is $3, how much revenue is collected?b. What is the price elasticity of demand at this point?c. Could the bridge authorities increase their revenues by changing their price?d. The Red and
6. Consider the demand curve Q 100 50P.a. Draw the demand curve and indicate which portion of the curve is elastic, which portion is inelastic, and which portion is unit elastic.b. Without doing any additional calculation, state at which point of the curve expenditures on the goods are
5.a. For the demand curve P 60 0.5Q, find the elasticity at P 10.b. If the demand curve shifts parallel to the right, what happens to the elasticity at P 10?
4. The market for lemonade has 10 potential consumers, each having an individual demand curve P 101 10Qi, where P is price in dollars per cup and Qi is the number of cups demanded per week by the ith consumer. Find the market demand curve using algebra. Draw an individual demand curve and the
3. Maureen has the same income and faces the same prices as Sam and Bruce, but Maureen views 1 cup of orange juice and 1 cup of apple juice as perfect complements. Find Maureen’s optimal consumption bundle. How much additional income would Maureen need to afford her original consumption bundle
2. Bruce has the same income and faces the same prices as Sam in Problem 1, but he views 1 cup of orange juice as a perfect substitute for 1 cup of apple juice. Find Bruce’s optimal consumption bundle. How much additional income would Bruce need to be able to afford his original consumption
1. Sam spends $6/wk on orange juice and apple juice. Orange juice costs $2/cup while apple juice costs $1/cup. Sam views 1 cup of orange juice as a perfect substitute for 3 cups of apple juice. Find Sam’s optimal consumption bundle of orange juice and apple juice each week. Suppose the price of
16. Suppose your budget is spent entirely on two goods:bread and butter. If bread is an inferior good, can butter be inferior as well?
15. True or false: If each individual in a market has a straight-line demand curve for a good, then the market demand curve for that good must also be a straight line.Explain.
14. Mike spends all his income on tennis balls and basketball tickets. His demand curve for tennis balls is elastic. True or false: If the price of tennis balls rises, he consumes more tickets. Explain.
13. True or false: For a budget spent entirely on two goods, an increase in the price of one will necessarily decrease the consumption of both, unless at least one of the goods is inferior. Explain.
12. If you expected a long period of declining GNP, what kinds of companies would you invest in?
11. How can changes in the distribution of income across consumers affect the market demand for a product?
10. Do you think a college education at a specific school has a high or low price (tuition) elasticity of demand?
9. For a straight-line demand curve, what is the price elasticity at the revenue maximizing point?
8. Why don’t we measure the responsiveness of demand to price changes by the slope of the demand curve instead of using the more complicated expression for elasticity?
7. Summarize the relationship between price elasticity, changes in price, and changes in total expenditure.
6. To get the market demand curve for a product, why do we add individual demand curves horizontally rather than vertically?
5. Can the price-consumption curve for a normal good ever be downward-sloping?
4. Give two examples of what are, for most students, inferior goods.
3. Draw Engel curves for both a normal good and an inferior good.
2. Why is the quantity of education demanded in private universities much more responsive than salt is to changes in price?
1. Why does the quantity of salt demanded tend to be unresponsive to changes in its price?
5. Albert has a weekly allowance of $17, all of which he spends on used CDs (C) and movie rentals (M), whose respective prices are $4 and $3. His utility from these purchases is given by U(C) V(M). If the values of U(C) and V(M) are as shown in the table, is Albert a utility maximizer if he buys 2
4. Sue consumes only two goods, food and clothing. The marginal utility of the last dollar she spends on food is 12, and the marginal utility of the last dollar she spends on clothing is 9. The price of food is $1.20/unit, and the price of clothing is $0.90/unit. Is Sue maximizing her utility?
3. Note the relationship between your answers in Problems 1 and 2. What accounts for this relationship?
2. Same as Problem 1, except now Tom’s utility function is given by U(X, Y) X12Y12.
1. Tom spends all his $100 weekly income on two goods, X and Y. His utility function is given by U(X, Y) XY. If PX 4 and PY 10, how much of each good should he buy?
*25. Mr. R. Plane, a retired college administrator, consumes only grapes and the composite good Y(PY $1). His income consists of $10,000/yr from social security, plus the proceeds from whatever he sells of the 2000 bushels of grapes he harvests annually from his vineyard. Last year, grapes sold
*24. Consider two Italian restaurants located in identical towns 200 miles apart. The restaurants are identical in every respect but their tipping policies. At one, there is a flat $15 service charge, but no other tips are accepted. At the other, a 15 percent tip is added to the bill. The average
*23. At your school’s fund-raising picnic, you pay for soft drinks with tickets purchased in advance—one ticket per bottle of soft drink. Tickets are available in sets of three types:Small: $3 for 3 tickets Medium: $4 for 5 tickets Large: $5 for 8 tickets If the total amount you have to spend
22. Your local telephone company has offered you a choice between the following billing plans:Plan A: Pay $0.05 per call.Plan B: Pay an initial $2/wk, which allows you up to 30 calls per week at no charge.Any calls over 30/wk cost $0.05 per call.If your income is $12/wk and the composite good costs
21. Howard said that he was exactly indifferent between consuming four slices of pizza and one beer versus consuming three slices of pizza and two beers. He also said that he prefers a bundle consisting of one slice of pizza and three beers to either of the first two bundles. Do Howard’s
20. You have the option of renting a car on a daily basis for $40/day or on a weekly basis for $200/wk. Draw your budget constraint for a budget of $360/trip.a. Find your best affordable bundle if your travel preferences are such that you require exactly $140 worth of other goods for each day of
19. For the Continental Long Distance subscriber in Problem 18, what is the opportunity cost of making an additional 20 min of calls if he currently makesa. 40 min of calls each month?b. 140 min of calls each month?
18. Continental Long Distance Telephone Service offers an optional package for in-state calling whereby each month the subscriber gets the first 50 min of in-state calls free, the next 100 min at $0.25/min, and any additional time at the normal rate of $0.50/min.Draw the budget constraint for
17. The federal government wants to support education but must not support religion. To this end, it gives the University of Notre Dame $2 million with the stipulation that this money be used for secular purposes only. The accompanying graph shows Notre Dame’s pre-federal-gift budget constraint
16. Boris budgets $9/wk for his morning coffee with milk. He likes it only if it is prepared with 4 parts coffee, 1 part milk. Coffee costs $1/oz, milk $0.50/oz. How much coffee and how much milk will Boris buy per week? How will your answers change if the price of coffee rises to $3.25/oz? Show
15. For each of the following, sketch:a. A typical person’s indifference curves between garbage and the composite good.b. Indifference curves for the same two commodities for Oscar the Grouch on Sesame Street, who loves garbage and has no use for the composite good.
14. Paula, a former actress, spends all her income attending plays and movies and likes plays exactly three times as much as she likes movies.a. Draw her indifference map.b. Paula earns $120/wk. If play tickets cost $12 each and movie tickets cost $4 each, show her budget line and highest
12. Koop likes food but dislikes cigarette smoke. The more food he has, the more he would be willing to give up to achieve a given reduction in cigarette smoke. If food and cigarette smoke are the only two goods, draw Koop’s indifference curves.
11. Eve likes apples but doesn’t care about pears. If apples and pears are the only two goods available, draw her indifference curves.
10. For Alexi, coffee and tea are perfect substitutes: One cup of coffee is equivalent to one cup of tea. Suppose Alexi has $90/mo to spend on these beverages, and coffee costs$0.90/cup while tea costs $1.20/cup. Find Alexi’s best affordable bundle of tea and coffee.How much could the price of a
9. Suppose Picabo in Problem 8 has $3,600 to spend on skis and bindings each year. Find her best affordable bundle of skis and bindings under both of the preferences described in the previous problem. Skis are $480/pr and bindings are $240/pr.
8. Picabo, an aggressive skier, spends her entire income on skis and bindings. She wears out one pair of skis for every pair of bindings she wears out.a. Graph Picabo’s indifference curves for skis and bindings.b. Now draw her indifference curves on the assumption that she is such an aggressive
7. In Problem 6, suppose that Martha demands a pay raise to fight the inflation. Her boss raises her salary to $225/wk.a. Sketch the new budget constraint.b. What is the opportunity cost of an additional unit of the composite good?
6. In Problem 5, suppose that in an inflationary period the price of the composite good increases to $1.50 per unit, but the price of Malted Milk Balls remains the same.a. Sketch the new budget constraint.b. What is the opportunity cost of an additional unit of the composite good?
5. Martha has $150 to spend each week and cannot borrow money. She buys Malted Milk Balls and the composite good. Suppose that Malted Milk Balls cost $2.50 per bag and the composite good costs $1 per unit.a. Sketch Martha’s budget constraint.b. What is the opportunity cost, in terms of bags of
4. Originally PX is $120 and PY is $80. True or false: If PX increases by $18 and PY increases by $12, the new budget line will be shifted inward and parallel to the old budget line. Explain.
3. Smith likes cashews better than almonds and likes almonds better than walnuts. He likes pecans equally well as macadamia nuts and prefers macadamia nuts to almonds.Assuming his preferences are transitive, which does he prefer:a. Pecans or walnuts?b. Macadamia nuts or cashews?
2. Same as Problem 1, except now the price for every pound after 10 lb/wk is $4/lb.
9. If Ralph were given $10, he would spend none of it on tuna fish. But when asked, he claims to be indifferent between receiving $10 worth of tuna fish and a $10 bill.How could this be?
8. True or false: If the indifference curve map is concave to the origin, then the optimal commodity basket must occur at a corner equilibrium, except possibly when there are quantity discounts.
5. Explain in your own words how the slope of an indifference curve provides information about how much a consumer likes one good relative to another.
10. Repeat Problem 9, but instead suppose the buyer pays the tax, demand is P 28 Q, and supply is P 20.
9. Supply is P 4Q, while demand is P 20, where P is price in dollars per unit and Q is units of output per week.a. Find the equilibrium price and quantity (using both algebra and a graph).b. If sellers must pay a tax of T $4/unit, what happens to the quantity exchanged, the price buyers pay,
8. Many studies on rats and mice have established that charred meat grilled over hot coals causes cancer. Since the government cannot easily regulate home cooking methods, an alternative method has been proposed to discourage the consumption of barbecued meat. The proposal is to place a 100 percent
7. President Reagan negotiated a “voluntary” import quota on Japanese cars sold in the United States in the early 1980s. Some of his advisers had recommended that he impose a higher import tax (tariff) instead. Assuming the tariff was in the form of a constant tax T per Japanese car sold in the
6. For the tax described in Problem 5,a. What fraction of the tax does the seller bear?b. What fraction of the tax does the buyer bear?
5. Suppose state government levies a tax of $9 on each DVD sold, collected from sellers.a. What quantity of DVDs will be sold in equilibrium?b. What price do buyers pay?c. How much do buyers now spend in total?d. How much money goes to the government?e. Show the above results graphically.
4. Suppose instead the titanium market in Problem 2, with no tax but a price floor at$4/oz, suffers a reduction in supply because of dwindling titanium reserves. The new supply curve is P 2 Q. How does excess supply change due to the reduction in supply?Is the price floor still binding (does it
3. Suppose the titanium market in Problem 1, with a tax of $2/oz, experiences growth in the demand for titanium because of new-found medical uses. The new demand curve is P 8 Q. Find the change in government tax revenue due to the heightened demand for titanium.
2. In the market for titanium described in Problem 1 (with no tax), suppose that a price floor of $4/oz results in sales of only 2 tons/yr (with no tax). Describe a transaction that will make some buyers and sellers better off without harming others.
1. The government, fearful that a titanium shortage could jeopardize national security, imposes a tax of $2/oz on the retail price of this rare metal. It collects the tax from titanium sellers. The original supply and demand schedules for titanium are as shown in the diagram.Show, in the same
9. Suppose demand is P 600 Q and supply is P Q in the soybean market, where Q is tons of soybeans per year. The government sets a price support at P $500/ton and purchases any excess supply at this price. In response, as a long-run adjustment, farmers switch their crops from corn to
8. The demand for apartments is P 1200 Q while the supply is P Q units. The government imposes rent control at P $300/month. Suppose demand grows in the market to P 1400 Q.a. How is excess demand affected by the growth in demand for apartments?b. At what price would the government have
7. Suppose demand for seats at football games is P 1900 (150)Q and supply is fixed at Q 90,000 seats.a. Find the equilibrium price and quantity of seats for a football game (using algebra and a graph).b. Suppose the government prohibits tickets scalping (selling tickets above their face
6. For each scenario in Problem 5, state whether the effect is a change in demand or just a change in quantity demanded.
5. Using diagrams, show what changes in price and quantity would be expected in the following markets under the scenarios given:a. Crude oil: As petroleum reserves decrease, it becomes more difficult to find and recover crude oil.b. Air travel: Worries about air safety cause travelers to shy away
4. Suppose a newly released study shows that battery-powered toys harm a child’s development and recommends that parents adjust their purchasing behavior accordingly.Use diagrams to show the effect on price and quantity in each of the following markets:a. The market for battery-powered toys.b.
3. Hardware and software for computers are complements. Discuss the effects on the equilibrium price and quantitya. In the software market, when the price of computer hardware falls.b. In the hardware market, when the price of computer software rises.
2. The market for DVDs has supply and demand curves given by P 2Qs and P 42 Qd, respectively.a. How many units will be traded at a price of $35? At a price of $14? Which participants will be dissatisfied at these prices?b. What quantity of DVDs at what price will be sold in equilibrium?c.
1. Assume that tea and lemons are complements and that coffee and tea are substitutes.a. How, if at all, will the imposition of an effective ceiling price on tea affect the price of lemons? Explain.b. How, if at all, will the imposition of an effective ceiling price on tea affect the price of
9. Which would a rational poor person be more likely to accept and why?a. A $50,000 Mercedes (immediate resale value $30,000)b. $35,000 cash
8. Suppose you are a government official and need to collect revenue by taxing a product. For political reasons, you want the burden of the tax to fall mostly on consumers, not firms (who have been substantial contributors to your campaign fund). What should you look for when picking a product to
5. Identify each of the following as (1) a change in demand or (2) a change in the quantity demanded.a. Grape consumption falls because of a consumer boycott.b. Grape consumption falls because of a tax on grape producers.c. Grape consumption rises because of a good harvest.d. Grape consumption
2. What would the supply curve look like for a good that is not scarce? Assuming the good is useful, what would its demand curve look like? Explain why a positive price for a commodity implies that it is scarce.
*16. You have just purchased a new Ford Taurus for $20,000, but the most you could get for it if you sold it privately is $15,000. Now you learn that Toyota is offering its Camry, which normally sells for $25,000, at a special sale price of $20,000. If you had known before buying the Taurus that
utility maximizer, you should attend the Ani DiFranco concert. Explain.*15. Mr. Smith recently faced a choice between being (a) an economics professor, which pays$60,000/yr, or (b) a safari leader, which pays $50,000/yr. After careful deliberation, Smith took the safari job, but it was a close
*14. Yesterday you were unexpectedly given a free ticket to a Dave Matthews concert scheduled for April 1. The market price of this ticket is $75, but the most you could sell it for is only $50. Today you discover that Ani DiFranco will be giving a concert that same evening. Tickets for the Ani
*13. Dana has purchased a $40 ticket to a rock concert. On the day of the concert she is invited to a welcome-home party for a friend returning from abroad. She cannot attend both the concert and the party. If she had known about the party before buying the ticket, she would have chosen the party
2.30. Consider the demand curve for pomegranates in two countries. In one country, pomegranates are a critical part of the diet and are central to the preparation of many popular food recipes. For most of these dishes, there is no feasible substitute for pomegranates.In the second country,
2.29. Consider the following sequence of changes in the demand and supply for cab service in some city. The price P is a price per mile, while quantity is the total length of cab rides over a month (in thousands of miles).#January: Initial demand and supply are given by the equations Q s ! 30P " 30
2000: By the beginning of the year, the scare over contaminated strawberries ended when the media reported that the initial reports about the contamination were a hoax. A series of floods in the Midwest, however, destroyed significant portions of the strawberry fields in Iowa, Illinois, and
1999: There was a scare over the possibility of contaminated strawberries from Michigan. The market price was $4.50 per bushel, and 2.5 million bushels were sold.
1998: Uneventful. The market price was $5 per bushel, and 4 million bushels were sold.
2.28. Consider the following sequence of events in the U.S. market for strawberries during the years 1998–2000:
2.27. In a city, the price for a trip on local mass transit(such as the subway or city buses) has been 10 pesos for a number of years. Suppose that the market for trips is characterized by the following demand curves: in the long run: Q ! 30 "2P; in the short run: Q ! 15 " P 2.Verify that the
2.26. In each of the following pairs of goods, identify the one that you would expect to have a greater price elasticity of demand. Briefly explain your answers.a) Butter versus eggsb) Trips by your congressman to Washington (say, to vote in the House) versus vacation trips by you to Hawaiic)
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