1/ Suppose that Russ has budgeted $20 a month to buy candy bars, music downloads, or some combination of both. If Russ spends all his budget on candy bars he can obtain 40 bars a month; if he buys only downloads, he can buy 20 a month. Draw the Budget constraint line.

a.

What is the price of a candy bar?

b.

What is the price of a music download?

c.

What is the opportunity cost of a music download?

d.

What is the opportunity cost of a candy bar?

e.

Would the opportunity cost of each good change if Russ decided to increase his monthly

budget to $30 for the two items?

2/ Suppose that a nation's production possibilities can be represented by the table below. Draw the production possibilities curve.

Production Alternatives

Products: A B C D E

Clothing: 20 18 14 8 0

Food: 0 4 8 12 16

a. What is the maximum amount of food this economy can produce? How much clothing can it produce at this point?

b. If the economy is producing at alternative C, what is the opportunity cost of one more unit of food?

c. If the economy is producing at alternative C, what is the opportunity cost of one more unit of clothing?

d. Is this economy subject to the law of increasing opportunity costs? How can you tell?

e. Suppose the economy is currently producing 4 units of food and 16 units of clothing. Is this economy producing efficiently?

3/ State whether the following are primarily microeconomic or macroeconomic policy issues.

a. The Fed lowers interest rates to stimulate the economy.

b. California raises minimum wage to $10/hour in 2016.

c. Rent control is needed in Orange County

d. T-Mobile uses the "un-carrier" advertising campaign to draw wireless subscribers from competitors.

e. The federal government increased spending to bail out financial institutions during the Great Recession of 2008.

4/ State whether the following statements belong in positive economics or normative economics.

a. Raising minimum wage leads to job loss.

b. Minimum wage should be raised to help the working class.

c. California farmers use 80% of total water supply in the state.

d. Capitalism is a better economic system than socialism.

5/ Predict how each of the following events will affect the equilibrium price and quantity in the market for oil. In each case, sketch a supply and

demand diagram to support your answer.

a. Cars are becoming more fuel efficient, and therefore get more miles to the gallon.

b. The winter is exceptionally cold.

c. A major discovery of new oil is made off the coast of Norway.

d. The economies of some major oil-using nations, like Japan, slow down.

e. A war in the Middle East disrupts oil-pumping schedules.

f. Landlords install additional insulation in buildings.

g. The price of solar energy falls dramatically.

h. Chemical companies invent a new, popular kind of plastic made from oil.

6/ a. Oil production in Iran is increased after the nuclear deal. At the same time, the demand for oil by China declines due to a recession. Show graphically and in writing the impact of quantity and price bought and sold.

b. California farmers face unprecedented water drought. At the same time, the demand for almonds continues to rise. Show graphically and in writing the impact of quantity and price bought and sold.

7/ a. When tolls on the Dulles Airport Greenway were increased from $0.50 to $1.50, traffic decreased from 30,000 to 10,000 trips a day. What is the price elasticity of demand for the Dulles Airport Greenway? Is it elastic, inelastic, or unit elastic?

b. As the price of tomatoes increases from $2.5 to $3, the quantity produced increases from 1,800 tons to 2000 tons. What is the price elasticity of supply for tomatoes? Is it elastic, inelastic, or unit elastic?

c. Income rises by 10 percent; demand decreases by 4 percent. Calculate the income elasticity of demand. Is it an inferior good or a normal good? If it's a normal good, is it a luxury or a necessity?

d. When the price of pencils rises by 20 percent, the demand for erasers falls by 10 percent. Calculate the cross-price elasticity of demand. Are the goods complements or substitutes?

e. When the price of Coke rises by 20 percent, the demand for Pepsi rises by 20 percent. Calculate the cross-price elasticity of demand. Are the goods complements or substitutes?

f. A newspaper recently lowers its price from 80 cents to 60 cents. The number of newspapers sold increases from 280,000 to 320,000. What is the newspaper's elasticity of demand? Is it elastic, inelastic, or unit elastic? Given that elasticity, does it make sense for the newspaper to lower its price if it wants to increase total revenue?

8/ Given the following data for individuals, draw the market demand curve and market supply curve for CDs. Assume that these are the only individuals in the entire market. Price is per CD.

Price $8.00 $8.50 $9.00 $9.50 $10.0 $10.5

Quantity demanded in units per week

Mark 3 3 1 0 0 0

Lynn 8 7 6 3 2 1

Jason 6 5 4 3 0 0

Erin 10 9 7 6 4 2

Quantity supplied in units per week

Jeff 0 1 2 3 4 6

Beth 2 3 3 4 6 7

Chris 0 1 2 3 5 6

Abby 1 1 2 2 3 5

a. What would be the equilibrium price and quantity in this market?

b. Which would there beexcess demand or excess supplyat a price of $8.00? How many? Would the price rise or fall to go back to equilibrium?

c. Which would there beexcess demand or excess supplyat a price of $10.00? How many? Would the price rise or fall to go back to equilibrium?

10/ Solving supply and demand equations. The following supply and demand equations are given: QS= -5 + 2P and QD = 10 - P.

a. What are the equilibrium price and quantity?

b. If P = $4, What are QD and QS? Does this price cause a shortage or surplus? What's the shortage or surplus amount?

c. If P = $6, What are QD and QS? Does this price cause a shortage or surplus? What's the shortage or surplus amount?