1) How will each of the following changes in demand and/or supply affect equilibrium price and equilibrium quantity in a competitive market; that is, do price and quantity rise, fall, or remain unchanged, or are the answers indeterminate because they depend on the magnitudes of the shifts? Use supply and demand to verify your answers.

a. Supply decreases and demand is constant.

Prices increase, quantity decreases

b. Demand decreases and supply is constant.

Prices decrease, quantity decreases

c. Supply increases and demand is constant.

prices decrease, quantity increases

d. Demand increases and supply increases.

Prices indeterminate, quantity increases

e. Demand increases and supply is constant.

Prices increase, quantity increases

f. Supply increases and demand decreases.

Prices decrease, quantity indeterminate

g. Demand increases and supply decreases.

Prices increase, quantity indeterminate

h. Demand decreases and supply decreases.

Quantity decreases, supply indeterminate

2) Suppose there are three buyers of candy in a market: Tex, Dex, and Rex. The market demand and the individual demands of Tex, Dex, and Rex for candy are given in the table below. a. Fill in the table below for the missing values.

Filled below

b. Which buyer demands the least at a price of $5? The most at a price of $7?

Price Per candy at $5 the demand is least for Dex and the price per candy at $7 is Tex.

c. Which buyer’s quantity demanded increases the most when the price is lowered from $7 to $6? Tex demand increases when price is lowered from $7 to $6 which is 4 candys

d. Which direction would the market demand curve shift if Tex withdrew from the market? What if Dex doubled his purchases at each possible price?

If Tex withdrew from the market, there would be less demand at every price level. This implies that the demand schedule would shift to the left. If Dex doubled his purchases at every price level, this would increase demand. This implies that the demand schedule would shift to the right.

e. Suppose that at a price of $6, the total quantity demanded increases from 19 to 38. Is this a “change in the quantity demanded” or a “change in demand”?

Since the price is fixed in the statement, this is a change in demand. A change in the quantity demanded results from a change in price.

3) How would the following changes in price affect total revenue? That is, would total revenue increase, decrease, or remain unchanged?

a. Price falls and demand is inelastic.

Total revenue would decrease

b. Price rises and demand is elastic.

Total revenue would decrease

c. Price rises and supply is elastic.

Total revenue would increase

d. Price rises and supply is inelastic.

Total revenue would increase

e. Price rises and demand is inelastic.

Total revenue would increase

f. Price falls and demand is elastic.

Total revenue would increase

g. Price falls and demand is of unit elasticity.

Total revenue will remain same.

4) Danny “Dimes” Donahue is a neighborhood’s 9-year old entrepreneur. His most recent venture is selling homemade brownies that he bakes himself. At a price of $1.50 each, he sells 100. At a price of $1.00 each, he sells 300. Is demand elastic or inelastic over this price range? If demand had the same elasticity for a price decline from $1.00 to $0.50 as it does for the decline from $1.50 to $1.00, would cutting the price from $1.00 to $0.50 increase or decrease Danny’s total revenue?

5) Mrs. Simpson buys loaves of bread and quarts of milk each week at prices of $1 and 80 cents, respectively. At present she is buying these products in amounts such that the marginal utilities from the last units purchased of the two products are 80 and 70 utils, respectively. Is she buying the utility-maximizing combination of bread and milk? If not, how should she reallocate her expenditures between the two goods?

6) Suppose that Omar’s marginal utility for cups of coffee is constant at 1.5 utils per cup, no matter how many cups he drinks. On the other hand, his marginal utility per doughnut is 10 for the first doughnut he eats, 9 for the second he eats, 8 for the third he eats, and so on (that is, declining by 1 util per additional doughnut). In addition, suppose that coffee costs $1 per cup, doughnuts cost $1 each, and Omar has a budget that he can spend only on doughnuts, coffee, or both. How big would that budget have to be before he would spend a dollar buying a first cup of coffee?

7) Gomez runs a small pottery firm. He hires one helper at $12,000 per year, pays annual rent of $5000 for his shop, and spends $20,000 per year on materials. He has $40,000 of his own funds invested in equipment (pottery wheels, kilns, and so forth) that could earn him $4000 per year if alternatively invested. He has been offered $15,000 per year to work as a potter for a competitor. He estimates his entrepreneurial talents are worth $3000 per year. Total annual revenue from pottery sales is $72,000. Calculate the accounting profit and the economic profit for Gomez’s pottery firm.

8) A mathematical approximation called the rule of 70 tells us that the number of years that it will take something that is growing to double in size is approximately equal to the number 70 divided by its percentage rate of growth. Thus, if Mexico’s real GDP per person is growing at 7 percent per year, it will take about 10 years (= 70/ 7) to double. Apply the rule of 70 to solve the following problem. Real GDP per person in Mexico in 2005 was about $11,000 per person, while it was about $44,000 per person in the United States. If real GDP per person in Mexico grows at the rate of 5 percent per year, about how long will it take Mexico’s real GDP per person to reach the level that the United States was at in 2005? (Hint: How many times would Mexico’s 2005 real GDP per person have to double to reach the United States’ 2005 real GDP per person?)

9) Assume that the total value of the following items is $600 billion in a specific year for Upper Mongoose: net exports = $50 billion; value of new goods and services produced in the underground economy = $75 billion; personal consumption expenditures = $300 billion; value of the services of stay-at-home parents = $25 billion; gross domestic investment = $100 billion; government purchases = $50 billion. What is Upper Mongoose’s GDP for the year? What is the size of the underground economy as a percentage of GDP? By what percentage would GDP be boosted if the value of the services of stay-at-home spouses were included in GDP?