Professor Novarro

Pomona College
Economics 51
Homework #3
Due on Thursday, September 24th
1.

Which of the following are scarce goods? How do you know? Be specific.
a. A one-of-a kind Picasso painting: a scarce good. It is highly limited object, yet has an incredibly
high demand for it.
b. A one-of-a kind painting created by my 8-year-old: not a scarce good. It is one-of-a kind, but the
demand for it is simply non-existent.
c. Natural spring water: not scarce unless it has a price and is bottled.
d. Natural ocean water: not a scarce good, simply because the demand for ocean water is not high
because we cant drink it.
e. A #2 pencil: scarce good because people pay for it.

2.

The owner of a Los Angeles movie theater estimates that the demand function for movie tickets on any
particular weekday night is given by the following equations:
Qd=3700-200P
Qs=1000+100P
a.

What is the equilibrium price for movie tickets? How many tickets get sold on any particular
weeknight? $9, 1900 tickets

On weekends, more people go to the movies. Specifically, suppose that at any ticket price, 300 extra movie
tickets are demanded.
b.
c.
d.

Does the demand function change? If yes, how? Does the supply function change? If yes, how?
The demand function shifts to the right, while the supply function stays the same.
Compute the new equilibrium price and quantity for movie tickets.
10 dollars, 2000 tickets
Illustrate your result with a supply and demand diagram. Put price on the vertical axis. Denote the
initial equilibrium point as point A. Denote the new equilibrium as point B. Denote the coordinates
of both points on the axes. You do not need to draw to scale.

e.

3.

Suppose the owner of the movie theater kept the price of movie tickets at the level computed in part a.
On a weekend night, would there be a shortage or a surplus of tickets? Compute an explicit number.
Illustrate it in the diagram from part d.
There would be a shortage in the tickets. 300 people would not be able to get tickets.

The market for tickets to the symphony can be described by the following demand and supply curves:
Qd=20,000-90P
a.
b.

Qs=10,000+110P

What are the equilibrium price and quantity in the ticket market? $50, 15,500 tickets
Lovers of classical music persuade Congress to impose a price ceiling of $40 per ticket. How
many tickets are now sold in the market? Does this policy get more or fewer people to attend
classical music concerts?
The supply of tickets would go down to 14,400 tickets, so fewer can attend.

4.

How do the following events influence GDP?

a. Each of five mothers living in a neighborhood takes care of her pre-school child in her
own home. No influence on GDP
b. The mothers share the childcare work, each one taking all five children one day a week.
No influence on GDP.
c. Four of the mothers pay the fifth to take care of their children five days a week (taking
care, of course, to pay the required Social Security taxes!).
GDP would go up, since it is a consumption of a good (in this case, a service).
d. Mary buys a new car from a dealer for $20,000.
GDP goes up because consumption of a good.
e. Dave sells Mary a used car for $7,000.
No influence on GDP.
f.

Dave sells his old car to a dealer for $6,000. The dealer washes it, lists it in the classified
ads and on the dealers web page and then sells it to Mary for $8,000.
There is an increase in the GDP, since the dealer made of a profit.

g. A Japanese company builds a factory in Tennessee. (If this affects GDP, is it the Japanese
or the American GDP?)
It only raises American GDP.
h. A Japanese company buys stock in a Tennessee company.
No influence on GDP.
i.

An earthquake destroys many structures in the business district of Santa Cruz, California.
The structures are not rebuilt this year.
Decrease in GDP.

j.

An earthquake destroys much of Santa Cruz, and within a short time the city is rebuilt as
it was before.
Increase in GDP, due to rise in government services.

5.
Use aggregate supply and demand diagrams to explain what would happen to GDP and
inflation in the following circumstances. Put P for price level on the vertical axis and GDP as a
measure of aggregate output on the horizontal axis.
a. Consumers decide to cut back their savings, and buy more household appliances.

b. Tornadoes destroy many factories in the country, while a severe drought ruins many
crops.

c. Miraculous new technological developments raise productivity in manufacturing.

d. Because of worries over the deficit, the government sharply curtails its expenditures on
social programs.

6. Fraternia is a small utopian community which produces and consumes only 2 goods: Beer and
chips. Fraternia does not trade with anybody else.

In 2006, Fraternia produced 600 bottles of beer and 600 bags of chips. The
market price of beer was $1 a bottle and the market price of a bag of chips
was $2. In 2007, Fraternia produced 650 bottles of beer and 700 bags of
chips. The 2007 prices of beer and chips were $1.15 and $2.10 respectively.
a. Compute Fraternias nominal GDP in 2006 and 2007.

b. Taking 2006 as the base year, compute real GDP for 2006 and 2007. What is the rate of
growth of real GDP between the two years?

c. Compute the ratio of nominal to real GDP for 2007. Provide an intuitive interpretation
for this numberwhat does it measure?