1. A market research team has come up with the demand and supply schedules for gasoline in Motorville in the table below. Use these data to analyze the situation in the market for gasoline in Motorville.

Price (cents per gallon)	Quantity demanded (thousands of gallons per week)	Quantity supplied (thousands of gallons per week)
90	80	20
100	70	30
110	60	40
120	50	50
130	40	60
140	30	70
150	20	80

1. Drawa graph showing the demand curve for gasoline and the supply curve of gasoline. Mark the market equilibrium price and quantity in your graph.Make sure to have price on the vertical axis and quantity on the horizontal axis. Otherwise, no credit is given. (2 points)

1. What is the market equilibrium price and quantity? (not definition, just state the actual equilibrium price and quantity based on the information in the table) (2 points)

1. Suppose the price is $1.30. Describe the situation in the market and explain how the price adjusts. (2 points) (there are two parts to this question)

1. Now suppose the price is $1.00. Describe the situation in the market and explain how the price adjusts. (2 points) (there are two parts to this question)

1. Draw the corresponding graphs:
   1. Draw the demand curve for a product with unit price elasticity of demand at all prices.

(2 points)Make sure to have price on vertical axis and quantity on horizontal axis.

1. Draw the demand curve for a product with a perfectly elastic price elasticity of demand at all prices. (2 points).Make sure to have price on vertical axis and quantity on horizontal axis.

1. Draw the demand curve for a product (good or service) with a perfectly inelastic price elasticity of demand at all prices.(2 points).Make sure to have price on vertical axis and quantity on horizontal axis.

3. The marketing people at Ben and Jerry's Ice Cream Company believe that if they lower

the price of their Cherry Garcia flavor ice cream by 25%, the quantity demanded will

increase by 5%.

a). What is the price elasticity of demand? (show your calculation) (2 points)

b). If they are correct in their belief, what will happen to their total revenue? Increase or

Decrease? Justify your answer. (2 points)

4. When the price of milk rose 50%, the quantity of milk sold fell 25% and the sale of

breakfast cereal also fell 25%.

a) Calculate the price elasticity of demand for milk. Show you calculation. (2 points).

b) Calculate the cross elasticity of demand for breakfast cereal. Show your calculation.

(2 points).

5. If people's income increases by 2 % and the price does not change, the quantity of airplane

travel demanded increases by 6%.

a) what is the income elasticity of demand for airplane travel? Show your calculation.

(2 points).

b) Is airplane travel a normal good/service or an inferior good or service? (1 point)

Part 2

Problem 1. Silvio's Pizza is a small pizzeria. The firm's production function is shown in the table below:

Output with Output with

Labor Plant 1 (1 oven) Plant 2 (2 ovens)

(workers per week) (pizzas per week)

1 50 60

2 80 130

3 100 180

4 110 220

5 115 240

a. Suppose that Silvia's costs include only the cost of renting ovens, which is $100 per oven per week, the labor cost, $280 per worker per week, and the opportunity cost of Silvia's entrepreneurship, $1,000 per week. If Silvia's uses Plant 1, what is the marginal product of the 3rd worker (how many pizzas per week)? Show your calculation.

b. Suppose Silvia's uses Plant 2. If Silvia hires the 4th worker, will the firm experience diminishing, increasing, or constant returns? Explain.

c. Suppose Silvia's uses Plant 1 and hires 3 workers. What is the firm's average fixed cost? Show your calculation.

d. Suppose Silvia's uses Plant 1 and hires 2 workers. What is the firm's average variable cost? Show your calculation.

e. Suppose Silvia's uses Plant 2 and hires 4 workers. What is the firm's average total cost?

Problem 2. Answer the following question based on the figure given below:

Quantity Total cost, TC (pizzas per (dollars per hour) hour) 10 18 30 WIN 48 70 98 120