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Unit 1
Part A.
Name:
1. Are the following items scarce? Indicate yes or no and explain your answer.
a. Fresh air
b. Water
c. Gasoline
d. Diamonds
e. H1N1 (aka Swine Flu)
2. What can you say about the price associated with each of the products listed above?
Part B.
Explain the opportunity cost of each decision in the following situations. Try to identify both
implicit and explicit kinds of costs.
1. A student decides to go to college rather than entering the workforce.
2. A student has an economics test and a calculus test on the same day. She decides to
study for the economics test.
3. A student athlete decides to forego his senior year of college to turn pro.
4. A student spends his or her lunch money on pizza rather than healthy food options.
1
Part C.
Use the production possibilitiesy curve to answer the following questions.
B
C
Good A
Good B
Good B
(right)?
2. The price of bubble gum, a close substitute for jelly beans, increases.
4. People finally believe their dentists warnings about eating sugary treats all day.
5. The government places a tax on foreign jelly beans, which have a considerable share of
the market.
7. A politician known to love eating jelly beans is elected president, markedly increasing
their popularity.
Problem 1
The supply curve for the only two firms in a competitive industry are given by P = 2Q1 and P = 2+Q2,
where Q1 is the output of the first firm and Q2 is the output for the second firm.
Graph each Supply curve.
Firm 1 Supply curve graph
If the price is $3, what is the producer surplus for the first firm (look at the first supply curve given)
and for the same price, what is the producer surplus for the second firm (look at the second supply
curve given)?
Producer surplus in market 1 is
___________________________
_____________________________
Problem 2
For the demand curve shown, find the total amount of consumer surplus that results in the gasoline
market, if gasoline sells for $4/gallon.
10
14
P ($/gallon)
42
0
80
100
Price floors and ceilings can be plotted with supply and demand curves. Use Figure 22.1 to answer the
questions. Fill in the answer blanks or underline the correct words in parentheses.
3. What quantity is demanded and what quantity is supplied if the government passes a
law requiring the price to be no higher than $30? This is called a price ceiling.
(A) Quantity demanded _____________
(B) Quantity supplied _______________
(C) There is a (shortage / surplus) of ____________
4. What quantity is demanded and what quantity is supplied if the government passes a
law requiring the price to be no lower than $80? This is called a price floor.
(A) Quantity demanded _____________
(B) Quantity supplied _______________
(C) There is a (shortage / surplus) of ____________
(D)What happens to total consumer or producer surplus?
(G) Is society better or worse off after the price floor is imposed? Explain.
(H) What is the name for the change in total (producer and consumer) surplus
that results from a floor or ceiling being imposed?
Elasticity: An Introduction
In many circumstances, it is not enough for an economist, policymaker, firm or consumer to
simply know the direction in which a variable will be moving. For example, if I am a
producer, the law of demand tells me that if I increase the price of my good, the quantity
demanded by consumers will decrease. The law of demand doesnt tell me what will happen
to my total revenue (the price of the good times the number of units sold), however. Whether
total revenue increases or decreases depends on how responsive the quantity demanded is to
the price change. Will it decrease a little? A lot? Throughout the discipline of economics, in
fact, the responsiveness of one variable to changes in another variable is an important piece of
information. In general, elasticity is a measurement of how responsive one variable is to a
change in another variable that is, how elastic one variable is given a change in the other,
ceteris paribus (that is, holding all other variables constant).
Because elasticity measures responsiveness, changes in the variables are measured relative to
some base or starting point. Consider the following elasticity measurements:
The price elasticity of demand (elasticity without specification probably refers to this type):
Ed = Percentage change in quantity demanded
Percentage change in price
Less vital for our purposes, but also used in econ study are types of elasticity related
to supply, such as.
The price elasticity of supply, Es:
Es:
Part A
1. Now, suppose that your Machiavellian but benevolent economics teacher currently
allows you to earn grade improvement credit by submitting answers to the end-of-thechapter questions in your textbook. The number of questions youre willing to submit
depends on the amount of credit for each question. How responsive you are to a
change in the credit points the teacher gives you can be represented as an elasticity.
Write the formula for the elasticity of your labor supply:
Eps = ________________________________________
2. Now, consider that your manipulative teachers goal is to get you to submit twice as
many questions: a 100-percent increase. Underline the correct number in parentheses.
3. What would the income elasticity of demand tell us about a good? (Hint: consider
whether it would be positive or negative and what that would mean.)
4. What would the cross-price elasticity of demand tell us about the relationship between
two goods? (Hint: consider whether it would be positive or negative and what that
would mean.)
What would a demand curve with a constant elasticity (Ed) value look like?
If we have the consumers or market demand curves, we can precisely calculate the elasticity
value, or coefficient. Suppose the price is increased from P to P1 and so quantity demanded
decreased from Q to Q1.
Price
P
P1
D1
Q Q1
Quantity
By making all numbers positive, we in effect take the absolute values of these changes, and so
the elasticity coefficient will be positive. Note that we have used the average of the two prices
and the two quantities. We have done this so that the elasticity measured will be the same
whether we are moving from Q to Q1 or the other way around.
Quantity Demanded
80
100
120
140
160
180
200
1. What is the arc price elasticity of demand when the price changes from $1 to $2?
2. What is the arc price elasticity of demand when the price changes from $5 to $6?
Confirm that the results you see in these two cases square with how you responded to the
third bolded question on page 7!
Part E
Now, consider the graph below which graphs the demand schedule given on the previous
page. Recall the slope of a line is measured by the rise over the run:
slope = rise / run = P / Q
1. Using your calculations of P / Q from Question 3, calculate the slope of the demand
curve.
2. Using your calculations of P / Q from Question 4, calculate the slope of the demand
curve.
3. The law of demand tells us that an increase in price results in a decrease in the quantity
demanded. Questions 1 and 2 above remind us that the slope of a straight line is constant
everywhere along the line. Along this demand curve, a change in price of $1 generates a
change in quantity demanded of 20 cups of coffee a week.
Youve now shown mathematically that while the slope of the demand curve is related to
elasticity, the two concepts are not the same thing. Briefly discuss the relationship between
where you are along the demand curve and the elasticity of demand. How does this tie
into the notion of responsiveness?
Problem 1
The supply curve for the only two firms in a competitive industry are given by P = 2Q1 and P = 2+Q2,
where Q1 is the output of the first firm and Q2 is the output for the second firm.
Graph each Supply curve.
Firm 1 Supply curve graph
If the price is $3, what is the producer surplus for the first firm (look at the first supply curve given)
and for the same price, what is the producer surplus for the second firm (look at the second supply
curve given)?
Producer surplus in market 1 is
___________________________
_____________________________
Based on your reading, explain where to find producer consumer surplus on a graph:
Problem 2
For the demand curve shown, find the total amount of consumer surplus that results in the gasoline
market, if gasoline sells for $2/gallon.
10
P ($/gallon)
2
0
80
100
Q (1000s of gallons/year)
Price floors and ceilings can be plotted with supply and demand curves. Use Figure 22.1 to answer the
questions. Fill in the answer blanks or underline the correct words in parentheses.
What quantity is demanded and what quantity is supplied if the government passes a law
requiring the price to be no higher than $30? This is called a price ceiling.
(A) Quantity demanded _____________
(B) Quantity supplied _______________
(C) There is a (shortage / surplus) of ____________
What quantity is demanded and what quantity is supplied if the government passes a law
requiring the price to be no lower than $80? This is called a price floor.
(A) Quantity demanded _____________
(B) Quantity supplied _______________
(C) There is a (shortage / surplus) of ____________
(D)What happens to total consumer or producer surplus?