Microsoft Word - 101hw2f21
Professor Chisholm
Economics 101D&E
October 20, 2021
HOMEWORK #2
DUE DATE: WEDNESDAY, OCTOBER 27, 2021
This homework assignment is required and will be graded.
Only homework submitted at the start of class on the due date will be accepted.
You must show all formulas that you use and how you use them.
Work problems neatly and in a logical, organized manner.
Be sure to label all axes and graphs in your graphical analysis.
PROBLEM #1
In a small town, there is one upscale coffee shop and one deli. The daily demand for coffee at the
coffee shop, and the daily demand for soup at the deli, are presented below:
Demand for Coffee Demand for Soup
Price (per cup) Qd (cups) Price (per bowl) Qd (bowls)
$ XXXXXXXXXX $ XXXXXXXXXX
$ XXXXXXXXXX $ XXXXXXXXXX
$ XXXXXXXXXX $ XXXXXXXXXX
$ XXXXXXXXXX $ XXXXXXXXXX
a. Suppose the coffee shop owner is cu
ently charging $6.00 per cup of coffee and is
considering lower the price to $5.00 per cup. Calculate the price elasticity of demand for
coffee between $6.00 and $5.00.
. Is demand for coffee elastic, inelastic, or unit elastic in part a?
c. Suppose the deli owner is charging $6.00 per bowl of soup and is considering lower the
price to $5.00 per bowl. Calculate the price elasticity of demand for soup between $6.00
and $5.00.
d. Is the demand for soup elastic, inelastic, or unit elastic in part c?
e. Assume that both the coffee shop owner and deli owner will only cut their price (from
$6.00 to $5.00) if doing so increases their revenues. Without making any further
computations, determine which owner (if any) will make the price cut from $6.00 to $5.00.
f. Briefly explain your answer in part e using the concept of price elasticity of demand.
PROBLEM #2
The supply and demand schedules for bicycles is shown below:
Price/Bike Quantity Supplied Quantity Demanded
$ XXXXXXXXXX XXXXXXXXXX,453
XXXXXXXXXX XXXXXXXXXX,132
XXXXXXXXXX XXXXXXXXXX
XXXXXXXXXX, XXXXXXXXXX
XXXXXXXXXX, XXXXXXXXXX
a. Find the equili
ium quantity and price for bicycles in this market.
. The local government wants to encourage more people to bike to work and so imposes
a price ceiling on bikes, such that bike stores cannot sell bikes for more than $350 each.
Will this market experience a surplus or a shortage? Find the size of this surplus or
shortage. (You may find it helpful to sketch the demand and supply curves, although
a graph is not required for this problem.)
c. If the price ceiling were set at $600 instead, how many bicycles would be exchanged?
PROBLEM #3
The following graph represents the demand and supply for a product. The local government
decides to impose a per-unit tax of $4.00 on this product. (Assume that the sellers must remit
$4.00 to the government for every unit of the product they sell.) Answer the questions on the next
page.
PROBLEM #3 (CONTINUED)
a. On the graph on the previous page, draw the new supply curve after the tax goes into effect.
. What is the new price that consumers will now pay for this product?
c. By how much has the price to consumers risen, as compared to the price before the tax
went into effect?
d. What is the new price that producers receive, per unit sold, after they have paid the tax?
e. By how much has the net price received by producers fallen?
f. Compare your answers in parts c and e. Which side of the market (consumers or producers)
ears the larger burden of the tax, or do they bear the burden equally?
g. Based on your answer to part f, and without doing any further computations, is demand
more elastic than supply, is supply more elastic than demand, or are supply and demand
equally elastic? Briefly explain your answer.
PROBLEM #4
The following graph shows the demand curve for hamburger sliders.
a. Compute the elasticity of demand between $.50 and $1.00. Is demand elastic, inelastic, or
unit elastic between these two prices?
. Find the total revenue when price is $.50 and compare it to the total revenue when price is
$1.00. Does revenue rise, fall, or remain constant when price rises from $.50 to $1.00?
c. Compute the elasticity of demand between $1.00 and $1.50. Is demand elastic, inelastic,
or unit elastic between these two prices?
d. Find the total revenue when price is $1.00 and compare it to the total revenue when price
is $1.50. Does revenue rise, fall, or remain constant when price rises from $1.00 to $1.50?
e. Briefly explain why total revenue can increase when the price of a product rises. Be sure
to include the concept of elasticity in your answer.
PROBLEM #5
Charlotte likes to go to Red Sox games at Fenway Park; she also enjoys listening to concerts by
the Boston Symphony Orchestra at Symphony Hall. Charlotte has $200 to spend on Red Sox and
concert tickets. The price of a Red Sox bleachers ticket is $50, and the student price for attending
a symphony concert is $25. The following table represents Charlotte’s total utility from Red Sox
games and from attending symphony concerts:
Q Red Sox Games Total Utility Marginal Utility (MUR) MUR/PR
XXXXXXXXXX
XXXXXXXXXX,000
XXXXXXXXXX,750
XXXXXXXXXX,750
XXXXXXXXXX,750
XXXXXXXXXX,500
Q Concerts Total Utility Marginal Utility (MUC) MUC/PC
XXXXXXXXXX
XXXXXXXXXX,000
XXXXXXXXXX,500
XXXXXXXXXX,625
XXXXXXXXXX,375
XXXXXXXXXX,875
a. Find Charlotte’s marginal utility of Red Sox games and concerts for each of the quantities
above (that is, fill in the first column of the table for each type of outing).
. Does Charlotte experience diminishing marginal utility for both products?
c. Now find the marginal utility per dollar spent on each product (that is, complete the second
column of the table for each type of outing).
d. If Charlotte’s goal is to maximize her utility, determine how many Red Sox tickets and
how many concert tickets she will purchase. Clearly demonstrate how you derived your
answer.
PROBLEM #6
Liam opened a craft beer store in January XXXXXXXXXXDuring the first twelve months, the store generated
$300,000 in revenue. Liam hired a beer specialist to help with sales, and another person to stock
eer at the store; their annual salaries were $24,000 and $12,000, respectively. The market value
of the refrigerators and other equipment in January 2020 was $130,000; by January 2021, the
market value was $110,000. The costs of beer and other supplies was $220,000 over the year. The
value of Liam’s entrepreneurial and business skills running this business during the first year was
$27,000. In addition to managing the business operations of the beer store, Liam also helped with
unning the cash register; if he had worked for another shop during these hours he would have
earned $18,000 in wages over the year. If instead of investing in his own business Liam had
invested in an alternative investment opportunity, he would have earned $8,000 in interest over
the year.
a. Find the cost of resources bought in the market.
. Calculate the implicit rental rate, including economic depreciation and foregone
interest.
c. Determine the cost of resources provided by the owner.
d. Based on your findings in parts a through c, find Liam’s economic profit.
e. Liam’s accountant has determined that accounting depreciation on his equipment over
the year was $7,000. Determine Liam’s accounting profit.
f. Compare the economic and accounting profits you found;
iefly explain any
differences.