Homework #1

Instruction:You need to show the detailed process to reach your answers.

Q.1(20 points)Assume that turkey meatball and beef meatball are substitutes.Also note that turkey and turkey meatball are two different objects; turkey is a material to make turkey meatball.The same caution applies to beef and beef meatball.

(1)We observe that the equilibrium quantity of turkey meatball falls.Explain whether or not a rise in the price of turkey is responsible for this observation.

(2)We also observe that the equilibrium price of beef meatball falls.Explain whether or not a rise in the price of turkey is responsible for this observation.

Q.2(20 points)Bert, as a consumer, places the value on a pair of jeans as follows.

Value of firstpair: $30

Value of secondpair: $28

Value of thirdpair: $26

Value of fourthpair: $24

Value of fifthpair: $21

Value of sixthpair: $19

Value of seventh pair: $17

Ernie, as a producer, pays the following cost to produce jeans.

Cost of firstpair: $12

Cost of secondpair: $15

Cost of thirdpair: $17

Cost of fourthpair: $19

Cost of fifthpair: $21

Cost of sixthpair: $24

Cost of seventh pair: $26

Using the information given above, answer the following questions.

(1)Derive the quantity demanded and the quantity supplied at the price of $19.

(2)Derive the equilibrium price and compute the sizes of the consumer and the producer surpluses at the equilibrium price.

Q.3(10 points)

(1) According to Professor Park's lecture, what is the economic meaning of P_xin the inverse demand function?

(2) According to Professor Park's lecture, what is the economic meaning of P_xin the inverse supply function?

Q.4(20 points)Janet is running a painting business.She receives $200,000 payment from buyers at the end of year, at which time she also pays $20,000 fixed cost and 30% of the revenues as a variable cost.

(1) An opportunity for new business opens for Janet from which she will make $100,000 accounting profits at the end of year.If she takes this new business, then she has to reduce her work for painting business, so the revenue from painting business will drop by 30%.What will be the size of annual economic profit from the new business?

(2) If the new business will last only for the next five years, so she can take the profits from the new business for five times starting from one year from now, what is the size of the value of the new business for Janet?Assume that the annual interest rate is 5%.

Park is always willing to give up 1 orange for 3 tangerines.

(1)What is the size ofMRS_TO(marginal rate of substituting tangerine for orange) for Park?

(2)What is the economic meaning of MRS_TO?

(3) Suppose that the price of one orange is $1 and the price of one tangerine is $0.25.Which fruit should Park buy between orange and tangerine?Use the economic meaning of MRS_TOto justify your answer.