1. Suppose that poor college students and wealth bankers have the following demand for restaurant meals:

Quantity Demanded Quantity Demanded

Price (Wealthy Bankers) (Poor College Students)

$15 21 10

20 20 8

25 19 6

30 18 4

a. As the price of tickets rises from $20 to $25, what is the price of elasticity of demand for (i) wealth bankers and (ii) poor college students? (Use the midpoint method in your calculations.)

b. Why might college students have a different elasticity than bankers?

2. While markets are generally a good way to organize economic activity, the government can improve the economy with externalities are present or when people do not believe the outcome is fair. Consider a policy designed to reduce teenaged smoking.

a. Studies indicate that the price elasticity of demand for cigarettes is about 0.4. If a pack of cigarettes currently costs $2 and the government wants to reduce smoking by 20 percent, by how much should it increase the price? (Just use the basic equation without the midpoint.)

b. If the government permanently increases the price of cigarettes, will the policy have a larger effect on smoking one year from now or five years from now?

c. Studies also find that teenagers have a higher price elasticity than adults. Why might this be true?

3. In class we explored the effects of the minimum wage on the economy. For the past several years many have pushed for a $15 per hour minimum wage, but in some parts of the US $15 per hour is common. F/M is getting close. For this problem, suppose the government increases the minimum wage to $20, which is above equilibrium wage in the market for unskilled labor.

a. Using a supply-and-demand diagram of the market for unskilled labor, show that market wage, the number of workers who are employed, and the number of workers who are unemployed. Also show the total wage payments to unskilled workers.

b. Now suppose the secretary of labor proposes another increase in the minimum wage all the way to $30 so that all workers receive a living wage. What effect would this increase have on employment? Does the change in employment depend on the elasticity of demand, the elasticity of supply, both elasticities, or neither.

c. If the demand for unskilled labor were inelastic, would the proposed increase in the minimum wage raise or lower total wage payments to unskilled workers? Would your answer change if the demand for unskilled labor was elastic?

4. Some say that COVID has allowed educators to explore different and better ways to educate college students. These new online techniques can be thought of as a technological advance that reduces the cost of education.

a. Use a supply-and-demand diagram to show what happens to price, quantity, consumer surplus, and producer surplus in the market for online college education with this change.

b. The online classes and the traditional in-person classes are substitutes. Even though MSUM treat them as the same, they could treat them as two separate classes. Use a supply-and-demand diagram to show what happens to price, quantity, consumer surplus, and producer surplus in the market for in-person education remembering in-person does not have the technology advance and there is the issue of substitutability. Should who enjoy teaching in-person be happy or sad by the technological advance?

c. Computers and online classes are complements. Use a supply-and-demand diagram to show what happens to price, quantity, consumer surplus, and producer surplus in the market for computers. Should computer producers be happy or sad about the technological advances in online classes?

d. Based on this analysis what do you expect to happen to the profitability of companies like HP and Apple?