Economics
SECTION ONE: 2 points
This section will test your knowledge of chapter five.
a) Create a figure representing the market for gasoline. Please use numbers in this figure. You choose the numbers to use. The figure may be hand-drawn (if necessary), but the numbers should be typed. Make the demand curve very inelastic.
If you hand-draw this, be certain to type your explanation including numbers.
b) What is your equilibrium price and quantity?
c) Indicate the area of consumer surplus.
d) Indicate the area of producer surplus.
e) Now there is an increase in a factor cost. Show this with a whole new figure. Type any explanation and numbers.
f) Explain what happens to consumer surplus.
SECTION TWO: 2 points
Please re-read chapter six carefully and answer the following questions.
a) Assume a market in equilibrium. The government now imposes a price floor above the equilibrium price. In one figure, show all of this.
If you hand-draw this, be certain to type your explanation.Numbers should be typed in the explanation. Parts b to f should be typed. This includes numbers.
b) Now indicate the area of deadweight loss with numbers or letters taken from the figure. You plug in the numbers or letters.
c) Explain what is meant by a price floor.
d) If the government imposed a tax on cigarettes that buyers now paid as part of the price of the cigarettes, how would this affect the market for cigarettes. You should speak in terms of a supply and demand curve and what changes in regard to the curves.
e) Assume the demand for a product is perfectly elastic (not cigarettes). What is the main determinant of perfectly elastic demand? Discuss.
f) Identify a product for which your demand is perfectly elastic and explain what could happen to make that demand less elastic.
SECTION THREE: 1 point
This section will involve your solving a consumer choice problem similar to that in chapter eight.
Pepsi consumed MU Pepsi Pizza consumed MU Pizza
1 9 1 20
2 8 2 16
3 7 3 12
4 6 4 8
5 5 5 4
6 4 6 0
a) You will need to include something else in the table above in order to solve for an optimal amount of Pizza and Pepsi. Update the table above and indicate here what you did and why. Be certain it is typed.
b) Assume Katie has $10 and wishes to maximize her total utility by purchasing the combination of Pizza and Pepsi that will do that. Here you will tell me what she buys first, then second, third, etc. Pizza is $2 slice and Pepsi is $1 can. Type everything.
c) What is Katie’s total utility ( use the proper number here and show how you got this number).
d) If someone gave Katie another dollar, what would she buy and what would her total utility be now? Type.
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