Question 1 (5 marks)

Special Agent Fox Mulder has a budget of $180. He spends it on conspiracy theory magazines (good X) and UFO videos (good Y). Each magazine costs $30, and each UFO video costs $20.

(a) Write out and plot Fox Mulder's budget constraint (2 points).

(b) What is Fox Mulder's trade-off? How many UFO videos must he give up to purchase an

additional conspiracy theory magazine? (1 point).

(c) Upon hearing of Mulder's obsessive expenditure, his boss, Assistant Director Walter Skinner, cuts his budget to $90. Write out and plot Mulder's new budget constraint. How has his budget constraint changed? (2 points).

Question 2 (5 marks)

The production possibility table for the making of Karaoke machines (good Y) and movie- quality Chewbacca masks (good X) is shown in the table below:

Combination Chewbacca masks (thousands) Karaoke machines (thousands)

A 0 10 B29 C47 D64 E80

(a) Plot the production possibilities data with Karaoke machines on the Y-axis and Chewbacca masks on the X-axis. What is the opportunity cost of the first 2,000 Chewbacca masks? (2 points).

(b) Between which points is the opportunity cost per thousand Chewbacca masks the highest? (1 point).

(c) At point D, what is the opportunity cost of 1,000 more Karaoke machines? What is the opportunity cost of 2,000 more Karaoke machines? (2 points).

1

Question 3 (5 marks)

Best friends Scott Baio and Willie Aames decide to open up a movie poster shop in downtown Los Angeles. The following relationships describe the supply and demand for movie posters:

Qd = 65,000 - 10,000P Qs = -35,000 + 15,000P

Where Q is the quantity and P is the price of a movie poster in dollars. (a) Complete the following table (4 points):

Price $6.00 $5.50 $4.50 $4.00 $3.50 $3.00 $2.50

Qs Qd

Qs - Qd

Surplus/Shortage

(b) What is the equilibrium price? (1 point). Question 4 (5 marks)

Gene Wilder's demand curve for lambs-wool sweaters is: Q = 2000 - 20P

(a) How many lambs-wool sweaters will be sold at $10? (1 point).

(b) At what price would 2,000 lambs-wool sweaters be sold? (1 point). (c) What would be the total revenue at a price of $70? (1 point).

(d) What is the point elasticity at a price of $70? (2 points).

Hint - for (d) use the following formula:

=