Q1. (A) Assume there is an increase in the price of electricity (which is the result of a decrease in the supply of electricity), and electricity and natural gas are substitutes. How would this affect the demand for natural gas, and what would happen to the equilibrium price and quantity of natural gas?

(B) "In the past five years the average price of our Chevrolets has risen about 6 percent a year, and each year we have sold 10 percent more cars than the previous year." How can this car dealer sell more cars as the price of the cars increases?

(C) Using a change in supply and/or demand, explain the following phenomena:

(i) All else constant, gasoline prices are higher in summer than winter months.

(ii) At the same time that the quality of personal computers has been increasing, the price of personal computers has been falling.

Q2. (A) The Warren & Smith Company manufactures commercial zippers of two kinds, kind X and kind Y. Its production department estimates that the profit function of the firm is

= 6X2 + 10Y2 - XY + 30

(i) The manager of the firm would like to know the level of output of zipper X and Zipper Y at which the profit of the firm is maximized and the level of this maximum profit.

(ii) The firm expects an order of both zippers that will require it to produce X+Y = 34 unit of both kinds of zippers (each unit may be a large number of zippers), and so the manager would also like to know how many of each type of zipper the firm must produce to maximize its profit, and what its maximum profit would be if it receives the order

(B) A firm's demand function is

Q = 40 - 2P

and its total cost function is defined as

TC = 100 + 2Q + 0.25 Q2.

Use these two functions to form the firm's profit function and then determine the level of output that yields the maximum profit. What is the level of profit at the optimum level of output?