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Introduction to Microeconomics ECON 101 Online

ECON 101 Online Assignment Answers

This document articulates answers to questions in the Assignment.

Problem 1: ANSWER

a) The person with a comparative advantage in producing wakeboards is the person who has
the lower opportunity cost of producing a wakeboard.

Roland’s production possibilities show that to produce 5 more wakeboards he must produce 10
fewer water skis. So Roland’s opportunity cost of producing a wakeboard is 2 water skis.

Amy’s production possibilities show that to produce 10 more wakeboards, she must produce 5
fewer water skis. So Amy’s opportunity cost of producing a wakeboard is 1/2 a water ski.

Amy has a comparative advantage in producing wakeboards because her opportunity cost of
producing a wakeboard is less than Roland’s.

The person with a comparative advantage in producing water skis is the person who has the
lower opportunity cost of producing a water ski.

Roland’s production possibilities show that to produce 10 more water skis he must produce 5
fewer wakeboards. So Roland’s opportunity cost of producing a water ski is 1/2 wakeboards.

Amy’s production possibilities show that to produce 5 more water skis, she must produce 10
fewer wakeboards. So Amy’s opportunity cost of producing a water ski is 2 wakeboards.

Roland has a comparative advantage in producing water skis because his opportunity cost of
producing a water ski is less than Amy’s.

b) Amy has a comparative advantage in producing wakeboards, so she specializes in


wakeboards. Roland has a comparative advantage in producing water skis, so he specializes in
producing water skis. Amy produces 20 wakeboards and Roland produces 50 water skis.

Before specializing, they produced 15 wakeboards (Amy’s 10 plus Roland’s 5) and 45 water skis
(Roland’s 40 plus Amy’s 5).

By specializing, they increase their total output by 5 wakeboards and 5 water skis. They can
share this gain by trading 1 water ski for 1 wakeboard. Amy can get water skis from Roland for
less than it costs her to produce them. Roland can buy wakeboards from Amy for less than it
costs him to produce them. Both Amy and Roland achieve gains from specialization and trade.
Introduction to Microeconomics ECON 101 Online

Problem 2: ANSWER

a) The Law of Supply states that “other things remaining the same, the higher the price of a
good, the greater is the quantity supplied; and the lower the price of a good, the smaller is the
quantity supplied.

Any example can be given, as long as the explanation shows the relationship between quantity
supplied and price.

b)
i. This is an example of a change in supply. The weather is a factor that has changed for
the worse and caused the supply curve to shift to the left.

ii. This is an example of a change in supply. The price of leather, which is an input to the
production of leather shoes (hence, a factor of production) has changed, which resulted
in change in supply. Normally, if the price of a factor of production rises, the supply
curve would shift left and result in a decrease of production.

Problem 3: ANSWER

a) Good F becomes more fashionable and popular

The demand curve will shift RIGHTWARD.


Equilibrium price increases Equilibrium quantity increases.

b) The price of good G, a substitute for good F, goes down

The demand curve will shift LEFTWARD.


Equilibrium price decreases Equilibrium quantity decreases.

c) Consumers anticipate declining prices for good F

The demand curve will shift LEFTWARD.


Equilibrium price decreases Equilibrium quantity decreases.

d) There is a surge in the population that uses good F

The demand curve will shift RIGHTWARD.


Equilibrium price increases Equilibrium quantity increases.
Introduction to Microeconomics ECON 101 Online

e) Income falls for a large subset of consumers who buy good F.

The demand curve will shift LEFTWARD.


Equilibrium price decreases Equilibrium quantity decreases.

f) The cost of widgets (an input used to produce good F) increases.

The supply curve will shift LEFTWARD.


Equilibrium price increases Equilibrium quantity decreases.

Problem 4: ANSWER

Equilibrium occurs when supply equals demand. We set the given demand and supply equation
equal to each other and solve for Q.

(demand) 200 – 5Q = 110 + 10Q (supply).

Add 5Q to both sides and subtract 110 from both sides to get:
90 = 15Q

Divide both sides by 15 to get:


Q = 90/15 = 6
Therefore, the equilibrium quantity is 6.

To find the equilibrium price, substitute Q into either the supply or demand equation and solve
for P.
P = 200 – 5(6) = 200 - 30 = 170 (using the demand equation).
P = 110 + 10(6) = 110 + 60 = 170 (using the supply equation).
Therefore, the equilibrium price is $170.

Problem 5: ANSWER

a) The price elasticity of demand for pancakes is -1.83. The price elasticity of demand is the
percentage change in the quantity demanded of the good divided by the percentage change in
the price of the good. So the price elasticity of demand equals -22 percent divided by 12
percent, which is -1.83 (demand elastic).

b) The cross elasticity of demand between pancakes and waffles is 1.17. The cross elasticity of
demand is the percentage change in the quantity demanded of one good divided by the
percentage change in the price of another good. So the cross elasticity of demand is the
percentage change in the quantity demanded of waffles divided by the percentage change in
the price of pancakes. The cross elasticity equals 14 percent divided by 12 percent, which is
1.17 (substitutes).
Introduction to Microeconomics ECON 101 Online

Problem 6: ANSWER

a) False. As the prices of apples fall, the quantity demanded for apples increases. This is a
movement along a given demand curve. When we say “demand for apples increases”, that
means a rightward shift of the demand curve occurred, caused by anything other than the price
of apples.
b) True. If apples are considered a normal good, then demand will fall. If apples are considered
an inferior good, then demand will increase.
c) False. On a given demand curve, the number of buyers is fixed.
d) True. When more suppliers enter into a market, the supply curve shifts rightward.

Problem 7: ANSWER

At 30 cents apiece, Mrs. Brown sells 100 candies per week. If she drops her price by 5 cents, her
weekly sales will increase to 110 candies per week. Is the demand for candies elastic or
inelastic? Prove your answer by calculating the elasticity of demand and confirm the result by
using the total revenue test – show all your work.

First, use the formula for elasticity of demand, which equates to:

Ed = (Δ in quantity demanded)/(average quantity demanded)


(Δ in price)/(average price)

Let’s look at the numerator of the formula first

The change in quantity demanded was 100 to 110 candies per week 110-100= 10
But, we need to look at the change in quantity as a change in the average quantity, so we need
to calculate the average change in quantity equals (100+110)/2=105.
So, the resulting value for the numerator equates to (Δ in quantity demanded)/(average
quantity demanded)
= (110-100)/((100+110)/2)
= 10/105
= 0.0952

Now let’s look at denominator of the formula

The change in price was 30 to 25 cents per candy -> 25-30= -5


But, we need to look at the change in price as a change in the average price, so we need to
calculate the average change in price equals (30+25)/2=27.5
So, the resulting value equates to (Δ in price)/(average price)
= (25-30)/((30+25)/2)
= -5/27.5
= -0.1818
Introduction to Microeconomics ECON 101 Online

Putting it all together


Ed = (Δ in quantity demanded)/(average quantity demanded)
(Δ in price)/(average price)

So, the resulting value equates to


= 0.0952/(-0.1818)
= -0.5237

Since 0 < |Ed| < 1, demand is inelastic.

Second, use the total revenue (TR) test.


When price = 30 cents:
Total revenue = price times quantity
Total revenue = $.30 times 100
Total revenue = $30

When price = 25 cents:


Total revenue = price times quantity
Total revenue = $.25 times 110
Total revenue = $27.50

As the price decreased, the total revenue decreased.


So, demand is inelastic.
Introduction to Microeconomics ECON 101 Online

Problem 8:

4000
Consumer
3600 Surplus

3200
Potential Loss from S
2800 Housing Search

2400
Deadweight
2000 Loss

1600
Rent Ceiling
1200

800 Producer
Surplus
400
D

0
20 40 60 80 100 120 140 Quantity (thousands of
units per month)

Given the diagram above which describes a binding Rent Ceiling,

a) Calculate the consumer surplus after the Rent Ceiling is in place.

CS = ½ bh
CS = ½ (60,000 x 1,200)
CS = 36,000,000

b) Calculate the producer surplus after the Rent Ceiling is in place.

PS = ½ bh
PS = ½ (60,000 x 1,200)
PS = 36,000,000
Introduction to Microeconomics ECON 101 Online

c) Calculate the Potential Loss from Housing Search after the Rent Ceiling is in place.

PLHS = bh
PLHS = (60,000 x 800)
PLHS = - 48,000,000

d) Calculate the Deadweight Loss due to the Rent Ceiling.

DWL = 2 x ½ bh (symmetry of the two small brown triangles)


DWL = 2 x ½ (20,000 x 400)
DWL = - 8,000,000

e) Calculate the change in consumer surplus due to the Rent Ceiling if the original
equilibrium occurred at a rent of $2000 and quantity of units at 80,000 per month.

ΔCS = new CS – old CS = 36,000,000 – old CS


ΔCS = 36,000,000 – ½ bh
ΔCS = 36,000,000 – ½ (80,000 x 1,600)
ΔCS = 36,000,000 – 64,000,000
ΔCS = - 28,000,000

Problem 9:

Influences that change the demand for a product include:

i. The prices of related goods. A rise (fall) in the price of a substitute of a good increases
(decreases) the demand for the good. A rise (fall) in the price of a complement of a good
decreases (increases) the demand for the good.
ii. The expected future price of the good. A rise (fall) in the expected future price of a good
increases (decreases) the demand for the good in the current period.
iii. Income. For a normal good, an increase (decrease) in income increases (decreases) the
demand for the good. For an inferior good, an increase in income decreases (increases)
the demand for the good.
iv. Expected future income and credit. An increase (decrease) in expected future income or
credit might increase (decrease) the demand.
v. The population. An increase (decrease) in population in the market increases
(decreases) the demand.
vi. Consumer’s preferences. If people’s preferences for a good rise (fall), the demand
increases (decreases).