Answer Key Homework #1

1. False. Carla has exactly the same costs as Steve because what is an explicit cost for Steve is an opportunity cost for Carla. She could rent out her factory for an alternative use and she is sacrificing that income by using the factory herself. 2. 3. True. See your class notes. True. See your class notes.

4. B. The varnish was a non-returnable sunk cost. The relevant question was: If I were starting from scratch with what I know now, what would I do? 5. 6. B. The word deserve indicates a value judgment is being made. $180. $6 per hour x 2 hours per week x 15 weeks in a semester equals $180.

7. a) Under the first scenario gas costs $1 per gallon. If Trevor must wait half an hour, then it costs him $50 plus $12 for the 20 gallons; his cost per gallon is therefore $3.10. Thus, Trevor prefers to pay $1 per gallon. b) Howard doesnt mind waiting in line; he prefers to pay $0.60 per gallon.
8. Draw a market picture in which the market price generates an excess demand. Identify the size of the excess demand. Explain how, why, and to where (under our nice assumptions) the market will adjust from the condition of an excess demand.
p S

Excess Demand

p1 D QS QD Q

Figure 3.3.7- Initial Market Condition - Excess Demand

If the market experiences an excess demand (too much quantity demanded for the quantity supplied), this would cause a competition among buyers to get some of the available quantity. They would compete by bidding up the price. As price rises the quantity demanded will fall and the quantity supplied will rise. The only place this adjustment process will stop is when the market price reaches a level that brings quantity supplied and quantity demanded into balance: an equilibrium. All of this happens with no one in charge. It is, under our nice assumptions, simply the dynamics of a market system in which autonomous individuals pursue their self-interest as suppliers or demanders.

9. This question consists of several parts:

P 1 2 3 4 5 6 7 8 9

Qs 0 1 2 3 4 5 6 7 8

Qd 15 13 11 9 7 5 3 1 0

A. Using the schedule given below, plot the supply and demand curves on the axes given
p
10 9 8 7 6 5 4 3 2 1 1 2 3 4 5 6 7 8 9 10

D
11 12 13 14 15 16

B. In the following statements, the underlined portions are taken as given. information derived above, rewrite the statements correctly.

Using the

a) As price falls from 7 to 2: supply increases, demand falls, and the market goes from an excess supply of one to an excess demand of seven. As price falls from 7 to 2: quantity supplied decreases, quantity demanded rises and the market goes from an excess supply of three to an excess demand of twelve. b) As price rises from 3 to 4 supply increases, demand falls, and the market goes from an excess supply of one to an excess demand of six. As price rises from 3 to 4 quantity supplied increases, quantity demanded falls, and the market goes from an excess demand of nine to an excess demand of six.
10. Suppose there is a baseball park with 10,000 seats and a demand for seats in the park as follows: Price per Ticket $16 $12 $8 $6 $4 Quantity Demanded 4,000 6,000 8,000 10,000 12,000

Referring to the given information, as price changes from $8 to $6 , calculate the demand elasticity for baseball tickets. Is it inelastic or elastic? Calculate change of total revenue when price decreases from $8 to $6. The Demand elasticity is:

10, 000 8, 000 %QuantityChange 8, 000 E =| |=| |= 1 6 8 %Own Pr iceChange 8

It has unitary elasticity. The revenue change is: 6*10,000-8*8,000= - 4,000