Problem Set 1 Due Date: October 5, Midnight Submit answers through Moonami

For graphs, it is often best to draw your graph, take a picture, and send the picture Note that you are encouraged to work with someone else in your TA section; hand in one set of answers to this problems with both your names. It is advisable that you use a spreadsheet! Be sure to keep a copy of your answers just in case. Total 15 points. 1. (5 points) Made the right way French Cassoulet (shown below) is the most delicious thing ever. Your friend Ella Marija Lani Yelich-O'Connor (a.k.a. Lorde) has left New Zealand to get away from the Lord of the Rings tourism and abandoned her music career to open an Amherst bistro, specializing in French cuisine. (She is shown here in cooking class with an anonymous friend.) She has done some market research and finds that your neighbors value Cassoulet according to the following schedule: Dinners MU Cassoulet 1 $48.00 2 $46.00 3 $43.70 4 $41.00 5 $38.00 6 $35.62 7 $32.90 8 $29.70 9 $26.73 10 $24.06 11 $21.65 12 $19.49 13 $17.54 14 $15.78

a. (2 points) Graph the demand curve for cassoulet. Does the demand curve have a positive or negative slope? Why?

2 b. (2 points) How many servings will Lorde sell at $46? How many at $29.7? At $19.49? c. (1 point) What will happen to the demand curve if a new study comes out showing a plant-based diet without sausage and duck fat, ingredients in cassoulet, reduces the risk of heart disease? What will happen to the demand curve if instead a study comes out eating sausage increases the risk of dementia?

2. (5 points) Production. Lorde pays $1250 a month to rent her restaurant and uses equipment that she rents another $500/month. and ingredients that cost $8 a serving for the first five servings but she has to pay a premium for additional materials, $11.7 for servings 6-11 and $12 for servings beyond that. (Note that she does not pay any premium on the first five servings even if she makes more servings than that!) (Note that she signed a lease and pays the rent regardless of how many dinners she serves; note that regardless of how much ingredients she buys for additional servings, she pays $8 for the ingredients for the first 5.) She hires workers at $20 each and finds that they produce servings according to the following schedule: Dinners MU Cassoulet

Total worker hours for these dinners 1 $48.00 0.20 2 $46.00 0.45 3 $43.70 0.75 4 $41.00 1.15 5 $38.00 1.65 6 $35.62 2.25 7 $32.90 3.00 8 $29.70 3.90 9 $26.73 5.05 10 $24.06 6.45 11 $21.65 8.10 12 $19.49 10.25 13 $17.54 12.90 14 $15.78 16.55

a. (1 point) Calculate and graph the additional workers needed for each serving. (Use a spreadsheet!) What is happening to the marginal productivity of labor as more is produced and more workers are hired? b. (2 points) Calculate and graph the marginal cost of each serving. (Use a

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spreadsheet so we can see how you made your calculations!) Why does the MC curve have the slope (up, down, or flat) that it does? What happens to the slope of the MC curve as Lorde produces more and more servings? Why? c. (1 point) Calculate and graph the marginal cost of each serving if workers unionize and gain a raise to $25/hour, with no change in productivity. What happens if they become more productive so each serving can be made with only 80% as much labor (at the old wage). Show your calculations! d. (1 point) Calculate the marginal cost of each serving at higher productivity and the higher wages. Compare the results of high wages and high productivity with the initial situation. Which would you prefer as an employer? Which would you prefer as a worker? Which is better for society?

3. (5 points) Perfect competition and equilibrium. a. (1 point) Put the demand and supply curves together (at the original productivity and wages). Lorde believes that she is in a perfectly competitive market. How many servings will she sell? At what price? b. (2 points) Draw the graph again and shade in the entire area of consumer surplus. Shade in the entire area of producer surplus.

c. (2 points) Calculate consumer surplus as the sum of the difference between the marginal utility and the price for each serving up to the last sold. Calculate producer surplus as the sum of the difference between price and marginal cost for each serving. What is the dollar value of consumer surplus? What is the dollar value of the producer surplus? What is the dollar value of the total social surplus?