Exercise one.

1.On the market for widgets, the maximum price anyone is willing to pay is $100 (quantity demanded is zero at a higher price). The equilibrium price is $80 and the equilibrium quantity is 442. Calculate consumer surplus on the market.

2. Hester owns an ice cream shop. It costs her $1 per cone to make 48 ice cream cones. If she sells 48 cones for $5 each, her producer surplus is equal to

3. On a competitive market, consumers demand 116 units and producers supply 10 units at a price of 5. When price increases to 10, consumers demand 84 units and producers supply 35 units. By how much did the market shortage decreased because of this price increase?

4. The consumer surplus at the equilibrium price of $10 and equilibrium quantity of 100 units is 3000. The government imposes a price floor at $39, which reduces quantity traded to 60. What is the resulting consumer surplus?

5. A per-unit tax is introduced on a market. The tax increases the price paid by consumers by $19, decreases the price received by producers by $21, and decreases the quantity traded on the market from 850 to 500 units. What is the tax revenue?

6. After an excise tax of $30 is introduced on a market, consumer surplus drops from 6500 to 4500 while producer surplus drops from 5000 to 4000. The equilibrium price before the tax was introduced was $95. What is the price paid by consumers after the tax?

7. A perfectly competitive firm realizes a total revenue of $2500 and a profit of $500. The firm sold its product at a price of $17 per unit. What was the average total cost

8. The price of coffee rose 22 percent and the quantity of coffee demanded fell by 79 percent. What is the price elasticity of demand for coffee? Report your answer in its absolute value, rounded to 2 decimal places.

9. A monopolist with constant marginal cost of $20 produces 100 units of product that is sells for a price of $44. If this monopolist was a perfectly competitive firm, it would produce 150 units of product. What is the revenue of this firm if it was perfectly competitive?

10. The marginal cost is constant and equal to 20. There are no fixed costs of production. What is the average variable cost of producing 68 units?

2.

1. In this problem, you are asked to consider cases in which "more is not better." For each of the following scenarios, draw an appropriate indifference curve map over different combinations of Brussels sprouts (X) and broccoli (Y). Put Brussels sprouts (X) on x-axis and broccoli (Y) on Y-axis. Draw 3 indifference curves for each scenario and labeled U1, U2 and U3, from the lowest to the highest utility level.

Hint: to determine the slope of the indifference curves, i.e. whether the indifference curves are upward sloping or downward sloping, start at an arbitrary point (on any indifference curve), reduce the amount of x and ask whether y would have to increase or decrease in order for the person to return to the same indifference curve, i.e., to be indifferent between the original bundle and the new bundle. You can refer to "four particular preferences" in the slides but don't expect the indifference curves to necessarily look like those depicted in slides.

a. I like Brussels sprouts, but I don't like broccoli (Brussels sprouts are an economic good and broccoli is an economic bad.)

b. I don't like Brussels sprouts, and I don't like broccoli.

c. Brussels sprouts are useless for me, and I don't like broccoli.

2. Alan always uses 2oz. of peanut butter and 2oz. of jelly in a PB&J sandwich, and these are the only two commodities he consumes. Assuming he has 2oz. of peanut butter and 2oz. of jelly, how many sandwiches could he make? What if he had 3oz. of peanut butter and 2oz. of jelly? 6oz. of peanut butter and 2oz. of jelly? 2oz. of peanut butter and 4oz. of jelly? Draw his indifference curve for peanut butter (x) and jelly (y) through (2,2). Similarly, draw his indifference curve through (4,4).

3.

Suppose Amy enjoys apple juice (A) and grape juice (G) according to U(A,G) = 4A+3G

a. What does her utility function say about her MRS of apple juice for grape juice?

(Hint: MRS equals the negative value of the slope of indifference curves)

b. Are apple juice and grape juice perfect substitutes or perfect complements? Why?

c. If apple juice costs 6 cents per ounce and grape juice costs 5 cents per ounce, and Amy has 30 cents to spend on these products, how much apple juice and grape juice should she buy to maximize her utility?

d. Draw the graph of her indifference map and her budget constraint, and show that the utility maximizing point occurs only on the A-axis where no grape juice is bought. Hint: to draw the indifference map, please sketch the indifference curves for U=18, and U=20, and give at least two examples of consumption bundles on each indifference curve.

e. Would Amy buy any grape juice if she had more money to spend?

f. How would her consumption change if the price of apple juice fell to 3 cents per ounce?

Task 05.

QUESTION 3 Snow Security Services is a monopolist in the market for freeze-resistant wall-top security cameras. The rm has xed costs of 20 and a constant marginal cost of 5 at all levels of output. The demand function for the market is given by D (p) = 12.5 0.25p. (a) Rewrite demand as the inverse demand function. (h) Set up the monopolist's problem and solve for the optimal price and quantity. (c) Calculate the maximized prot for Snowr Security Services. 9 QUESTION 4 Suppose that the inverse demand function for a monopolist's product is p (q) = 9 0.05q while the rm's total cost function is C(q) = 10+ 10g- 4g2 + 3:13. (3) Plot or sketch carefully the demand curve, marginal revenue curve, and marginal cost curve. ([1) At what volume of output does marginal revenue equal marginal cost? (c) What are the prot- maximizing output and price? (Note: you should check the second-order condition to verify that your answer is a maximum). Question 2: Suppose that a monopolist can produce any level of output it wishes at a constant marginal (and average} cost of $5 per unit. Assume that the monopoly sells its goods in two different markets that are separated by some distance. The demand curve in the rst market is given by Q1 = 60 P1, and the demand curve in the second {casket is given by, Q2= 100 2P2, {a} (b)- {c} {d} If the monopolist can maintain the separation between the two markets, what level of output should he produced in each market, and what price will be charged in each market? What are total prots in this situation? How would your answer change with respect to the output sold in each market, price charged, and total prots, if transportation costs were zero and the rm was forced to follow a single-price policy? Suppose the rm adopted a w pricing policy where each market as a whole must pay an equal entiy fee for the right to boy from the monopolist (equal to the smallest consmuer surplus in the two markets). In addition the customers in each market must pay a price per unit sold equal to marginal cost. In this case what would be the entry fee, how much would he sold in the two markets, and what are total prots of the monopolist? Suppose the rm adopted a M pricing policy where each market as a whole must pay an equal entry fee for the right to buy from the monopolist (equal to the smallest consumer surplus in the two markets). In addition the customers in each market must pay a price per unit sold and the monopolist designs an \"optimal\" two part tari' where the price is set as to maximize its prots. In this case what would he the entiy fee, what would be the \"optima \" price charged, and how much would be sold in the two markets, and what are total prots of the monopolist