Microeconomics Problem Sets

1. Suppose you win free tickets to a movie plus all you can eat at the snack bar for free. Would there be a cost to you to attend this movie? Explain.

2.Suppose we can divide all the goods produced by an economy into two types: consumption goods and capital goods. Capital goods, such as machinery, equipment, and computers, are goods used to produce other goods (i.e., if a country produces more capital goods this year, this country can produce more consumption goods in the next few years)

a. Use a production possibilities frontier graph to illustrate the trade-off to an economy between producing consumption goods and producing capital goods. Is it likely that the production possibilities frontier in this situation would be a straight line or bowed out? Briefly explain.

b. Suppose a technological advance occurs that affects the production of capital goods but not consumption goods. Show the effect on the production possibilities frontier.

c. Suppose that country A and country B currently have identical production possibilities frontiers but that country A devotes only 5 percent of its resources to producing capital goods over each of the next 10 years, whereas country B devotes 30 percent. Which country is likely to experience more rapid economic growth in the future? Illustrate using a production possibilities frontier graph. Your graph should include production possibilities frontiers for country A today and in 10 years and production possibilities frontiers for country B today and in 10 years.

3. Show in a diagram the effect on the demand curve, the supply curve, the equilibrium price, and the equilibrium quantity of each of the following events:

a. The market for newspapers in your town. The salaries of journalists go up.

b. The market for New York Giants cotton T-shirts. The Giants win the Super Bowl. c. The market for donuts. People realize how fattening donuts are.

d. The market for round-trip flights to Cancun, Mexico. Mexican all-inclusive resorts offer discounts to US college students AND the cost of oil and fuel increases.

4. In the U.S., the demand for pick-up trucks is P = 140 – 2.5Qd and the supply of pick-up trucks is P = 5Qs – 100 where P is the price of a pick up truck in thousands of dollars (when a truck costs $20,000, P = 20) and quantity is measured in millions of trucks.

a. In a graph, plot the demand and supply curves.

b. Using algebra, find the equilibrium price and quantity. Then clearly indicate the equilibrium price and quantity in your graph.

c. Suppose the U.S. Department of Transportation imposes costly regulation on manufacturers that cause them to reduce supply by half at any given price. Calculate and plot the new supply function and indicate the new equilibrium quantity and price in your diagram.