d)Consider a city that has a number of hot dog stands operating throughout the downtown area. Suppose that each vendor has a marginal cost of $1.50 per hot dog sold and no fixed costs. The maximum number of hot dogs that any one vendor can sell is 100 per day.

i)If the price of a hot dog is $2, how many hot dogs does each vendor want to sell?

ii)If the industry is perfectly competitive, will the price remain at $2 for a hot dog? If not, what will the price be?

iii)If each vendor sells exactly 100 hot dogs per day and the demand for hot dogs from vendors in the city is Q = 4,400 - 1,200P, how many vendors are there?

e) By observing an individual's behavior in the situations outlined below, determine whether each good is a normal good or an inferior good. If you cannot determine this, what additional information do you need?

i)Bill spends all his income on books and coffee. He finds $20 while rummaging through a used paperback bin at the bookstore. He immediately buys a new hardcover book about cats.

ii)Bill loses $10 he was going to use to buy a double espresso. He decides to sell his new book at a discount to a friend and use the money to buy coffee.

iii)Being bohemian becomes the latest teen fad. As a result, coffee and book prices rise by 25 percent. Bill lowers his consumption of both goods by the same percentage.

Bill drops out of art school and gets an M.B.A. instead. He stops reading books and drinking coffee. Now he reads the Wall Street Journal and drinks bottled mineral water

g) When peach canners process fresh peaches, they produce three products. The first, canned peaches, is sold in the marketplace; the others, liquid and solid wastes, are by- products that must be removed. The liquid is sometimes temporarily kept in holding ponds and later released into a nearby stream or sewer. Liquid dumped in the stream represents a negative externality to downstream users. In the peach-growing region, the marginal external costs of the canning process have been estimated as:

MEC = 0.000043Q

where Q represents the output of canned peaches in cases per week. The marginal cost of canning peaches (ignoring MEC) is:

MC = 2.00 + 0.000157Q

and the demand for canned peaches is:

P = 9.00 - 0.000243Q.

i.Optimally how many cases of peaches will be produced per week during the growing season, and what will the selling price per case be if producers ignore the costs imposed on others?

ii.If producers are forced to incorporate the marginal external costs into their production decisions, what will the new production rate and selling price be?

iii.In taking account of the external costs imposed on others (part b), what was the impact on the selling price and production rate of canned peaches? Explain the impact on market efficiency.

h) . The market interest rate is five percent and is expected to stay at that level. Consumers can borrow or lend all they want at this rate. Explain your choice in each of the following situations (you must show your work):

i.Would you prefer a $500 gift today or a $540 gift next year? (5 points)

ii.Would you prefer a $100 gift now or a $500 loan without interest for four years? (5 points)

iii.You win the "honest million" jackpot. You can have $1 million today or $60,000 per year for eternity (a right that can be passed on to your heirs). Which do you prefer? (5 points)