Introduction to Economics (Sem 1, 2018-2019)

Assignment 1
Deadline: 12 October 2018
Please submit to Ms. Eko Chen, T1-301-R5-H17

1. Consider a competitive market for automobiles. What would be the effects on the equilibrium
output and price caused by each of the following events (other things remain unchanged)?
a. A rise in the price of gasoline.
b. A fall in city bus fares.
c. A new technology allows cars to be built at lower costs.
d. Consumers expect the price of cars to fall soon.
e. Toyota decide to exit the automobile market.

2. Consider a public policy aims to smoking,

a. Studies indicate that the price elasticity of demand for cigarettes is about 0.4. If a pack of
cigarettes currently costs $2 and the government wants to reduce smoking by 20%, by
how much should it increase the price?
b. If the government permanently increases the price of cigarettes, will the policy have a
larger effect on smoking one year from now or five years from now?
c. Studies also find that teenagers have a higher price elasticity than do adults. Why might
this be true?

3. The table shows the production schedule of Bonnie’s Balloon Rides.

Labor (operators Outputs (rides per day)

per day)
1 balloon 2 balloons 3 balloons
1 4 10 13
2 10 15 18
3 13 18 22
4 15 20 24
5 16 21 25
To provide balloon rides, two inputs: operators (labor) and balloons (capital) are required.
Bonnie’s pays $500 a day for each balloon it rents and $250 a day for each balloon operator it
hires. To rent balloons, a yearly contract must be signed, so the cost of rental payment for
balloons is fixed in the short run. Bonnie’s can hire any number of operators each day.
a. Does the production satisfy diminishing marginal product? Explain.
b. Suppose that Bonnie’s is operating by renting 1 balloon currently. What is the marginal
product for the 4th operator? What is the marginal cost for the 13th ride?
c. For each number of balloons, graph the short-run ATC curves.
d. On your graph in part c, plot the long-run average cost curve.
e. In the long-run, how many balloons should Bonnie’s rent if it wants to provide 18 rides a
day?
Assignment 1 Veronica (MI XINYI)
1. a, b, c, e
2. a. 0.4 = 20%/x x = 50%
$2 * 50% = $1 +2$ = $3
Government needs to increase prices by 50%. In this case, from $2 to $3.

b. Five years from now. The elasticity is larger in the long run, because it may take some time for
people to reduce their cigarette usage. The hobbit of smoking is hard to break in the short run.

c. Teenagers do not have as much income as adults, therefore, they usually have a higher price
elasticity of demand. Also, adults are more likely to be addicted to cigarettes, they are less likely
to quit smoking in a short time.

3.
a. For 1 balloon, the marginal product is: 6, 3, 2, 1; For 2 balloons, marginal product is 5, 3, 2,
1; For 3 balloons, the marginal product is 5, 4, 2, 1. Therefore, the production satisfy diminishing
marginal product.

b.
1balloon 2 balloons 3 balloons

labor output ATC output ATC output ATC

1 4 187.5 10 125 13 134.62
2 10 100 15 100 18 111.11
3 13 96.15 18 97.22 22 102.27
4 15 100 20 100 24 104.17
5 16 109.38 21 107.14 25 110

c. The long-run average cost curve is the envelope curve shown in the graph
d. In the long-run, 2 balloons should Bonnie’s rent if it wants to provide 18 rides a day.