Professor Scholz Posted September 8th, 2009 Economics 101 Homework#1 Due September 15th, 2009 The problem set is due in class on September 15th, 2009. Don’t forget to include your name and discussion section#. These problems will be discussed in sections starting Wednesday, September 16th. 1. Joe quits his computer programming job, where he was earning a salary of $50,000 per year, to start his own computer software business in a building that he owns and was previously renting out for $24,000 per year. In his first year of business he has the following expenses: salary paid to employee, $40,000; rent, $0; other expenses, $5,000. What is the opportunity cost associated with Joe’s computer software business? Answer: 50000 + 24000 + 40000 + 5000 = 119,000 2. Sophie is a college student. Her monthly entertainment budget is $100. She uses it to consume two goods: football games and movies. The price of a football tickets is $20, and the price of a movie show is $5. Can Sophie afford 4 football games and 4 movie shows? What is the opportunity cost of watching a football game in terms of movie shows? Answer: 4 football games and 4 movie shows cost $20*4 + $5*4 = $100. Sophie can just afford this bundle. The opportunity cost of watching a football game is 4 movie shows. 3. Janet is a student in the Economics 101 class. She will take the first exam tomorrow morning. But she has not studied at all. The exam covers five equally difficult chapters. In the afternoon, Jane studied chapter 1 using exactly 1 hour. She thought to herself: I could finish a chapter in an hour, therefore I could take a rest now and start studying again at 8pm. I will be able to finish the other 4 chapters by 12am, and that leaves me enough time to sleep. Why her plan is problematic? Answer: Because each extra hour spent studying has lower productivity. Janet may not be able to finish 4 chapters within 4 hours because she can just finish one chapter in the first, her most productive hour. Because of diminishing marginal returns, the 2nd, 3rd, and 4th hour cannot be as productive. 4. The following is monthly demand and supply schedules of Babcock ice-creams in Madison. The quantities are in units of pints. Price Quantity demanded Quantity supplied $8 2000 6000 7 3000 5000 6 3500 4500 5 4000 4000 4 5000 3500 3 6000 3000 1) Suppose the price of ice-cream is $4 per pint. Is there excess demand or excess supply? Do you expect the price to raise or fall at this point? 2) What is the equilibrium price and quantity in the ice-cream market? 3) A warm summer causes people to demand 1000 more pints of ice-cream at every price. What is the new equilibrium price and quantity in the ice-cream market? Answer: 1) There will be excess demand of 1500 pints. Therefore the price should raise.2) $5. As this is the price at which quantity demanded equals to quantity supplied. 3) $6. The new quantity demanded at the price is 4500, which equals to the quantity supplied at this price. 5. Complete the following table: Example Demand shifts right or left? Supply shifts right or left? Equilibrium Price up or down? Equilibrium Quantity up or down? 1. Colorful prom night attire comes back into fashion, raising demand for pink bow ties. R No change U U 2. The expiration of drug patents increases the number of generic drugs available to consumers. No change R D U 3. Forecasters predict good times for the economy, prompting millions of potential stock sellers to hang on to their stocks (analyze the broad market for stocks). No change L U D 4. New technology allows GM and Ford to produce cars with fewer resources, while soaring gasoline prices cause consumers to want fewer cars. L R D Can’t determine 5. The entry of hundreds of nail salons in Southern California drags down price and profits. No change R D U 6. Airline pilots negotiate a dramatic salary increase, raising an input cost for the airlines and forcing them to raise ticket prices. (Look at the market for airline tickets.) No change L U D7. Mexico opens a deep-water port in Ensenada and some shippers quit using the LA port as a result. (Look at the market for shipments through the LA port.) L No change D D 8. The stock market sputters and wealth falls. Consider the market for luxury homes. L No change D D 9. Competition in the fast food industry increases the number of restaurants, while more people begin eating fast food due to busier work schedules. R R Can’t determine U 10. Parking fees for the New York Yankees skyrocket and ticket sales fall. (Look at the market for baseball tickets.) L No change D D 6. Suppose the demand curve for pizza in the café is given by Q=300 – 20P – 20Ps, where Ps is price of soda. The supply curve is Q=10P – 10. 1) If price of soda is Ps = 5. Find the equilibrium price and quantity of pizza. 2) Due to a price change of soda, the price per slice of pizza change to P*’ = 5. What must be the price of soda now? 3) Are pizza and soda substitute or complement in this example? Answer: 1) P* = 7, Q* = 60. 2) Ps = 8. 3) They are complement, as the demand function indicates that the quantity demanded of pizza is lower at each price if soda is more expensive.7. Bruce is the Chief Financial Officer for Asbury Products, a small clothing company. He knows if the company charges $100 for a pair of pants, it will sell 200 pairs. If it charges $40, it will sell 400 pairs. Absent additional information, he is willing to assume that demand is linear in price. In reviewing the company’s production technology, Bruce finds that if the price is zero, the company will supply no pants. If the price is 100, the company will supply 500 pairs of pants. Again, Bruce is willing to assume that supply is linear in price. Given Bruce’s assumptions, what is the equilibrium price and quantity for Asbury Products? Answer: Calculate demand, which equals P=160-0.3Q. Calculate supply, which equals P=0.2Q. Set demand equal to supply and find equilibrium Q=320 and P=64. 8. Mary owns a local sandwich shop. She plans to lower the price of the sandwich to increase the popularity. Mary knows from past experience that, when the price of the sandwich was 5 dollars, 200 sandwiches were sold per day. When the price was 6 dollars, 150 sandwiches were sold per day. Mary believes that the demand curve for sandwiches is
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