I. True/False questions. Mark the correct answer and briefly explain your choice to receive full credit (2 points each)

1.The cost of getting a degree in economics from a private school is $20,000 a year, including tuitions and textbooks.

TRUE ( ) FALSE ( )

　

　

　

　

　

　

　

2. Increased production leads to a lower price, which in turn increases demand.

TRUE ( ) FALSE ( )

 

　

　

　

　

　

3. Market for apartments, the equilibrium price $400 per month. The city’s government passes a

new rent control law, limiting the rent charged on apartments to $500 per month. Due to this new

law, there will be a shortage of apartments in the market.

TRUE ( ) FALSE ( )

　

　

　

　

　

　

　

　

4 "Increasing the price of a product never increases the amount of revenue you receive. If we want to increase revenue, we have to decrease price"

TRUE ( ) FALSE ( )

　

　

　

　

　

　

　

II. Short-answer questions. Briefly explain your answer to receive full credit (3 points each)

　

1. "In corn market, demand often exceeds supply and supply sometimes exceeds demand." "The price of corn rises and falls in response to changes in supply and demand". In which of these two statements are the terms "supply" and "demand" used correctly? Explain.

　

　

　

　

　

　

　

　

　

　

　

　

2. In a recent speech, the governor of your state announced: "One of the biggest causes of juvenile delinquency in this state is the high unemployment among 16 to 19 year olds. The low wages offered by employers in the state have given fewer teenagers the incentive to find summer employment. Instead of working all summer, the way we used to do, today’s teenagers slack off and cause trouble. To address this problem, I propose to raise the state’s minimum wage by $1.50 per hour. This will give teens the proper incentive to go out and find meaningful employment when they are not in school". Evaluate the governor’s plan to reduce juvenile delinquency.

　

　

　

　

　

　

　

　

　

　

　

　

　

　

　

　

　

　

　

　

　

　

3. Suppose you own two Crust Pizza franchises in your town. After reading the latest issue of Pizza Monthly, you have concluded that both of your locations are generating below average revenue. You hire a local economics professor to conduct a pricing experiment. Here is her report:

Location 1: A 10% increase in price resulted in a 25% drop in the quantity demanded.

Location 2: A 10% increase in the price resulted in a 15% drop in the quantity demanded.

Using this information, how should you alter your pricing policy to increase your revenue at each location? Explain

　

　

　

　

　

　

　

　

　

　

　

　

　

　

　

4. In the second half of 2002, several major U.S. airlines began running market test to determine if they could cut walk-up or unrestricted business fares and maintain or increase revenues. Continental Airlines offered an unrestricted fare between Cleveland and Los Angeles of $716, compared with its usual $2,000 fare and found that is earned about the same revenue as it would have collected with the higher fare. Making similar changes on its routs form Cleveland to Houston, Continental found that the new fare structure yielded less revenue, but greater market share. On the Houston-Oakland route, the new fare structure resulted in higher revenue. (Scott McCartney, "Airlines Try Business-Fare Cuts, Find they Do Not Lose Revenue", The Wall Street Journal, November 22, 2002.)

 

　

a What did these test results imply about business travel price elasticity of demand on the:

Cleveland-Los Angeles rout,

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Cleveland-Houston rout,

　

　

　

　

　

　

Houston-Oakland rout for Continental Airlines?

　

　

　

　

　

　

　

　

What factors caused these differences? Explain

　

　

　

　

　

　

　

　

　

IV. Problems solving. All underlying work must be shown to receive full credit. (20 points)

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1. Consider supply and demand picture of the market for Oreos. Note that the market is currently in equilibrium, with a price of P* and a quantity exchanged of Q*.

For each of the scenarios below, draw a new supply and demand graph that illustrates their impact on equilibrium price and quantity in the market for Oreos Cookies. Be sure to explain what is happening on your graphs

The price of Hydrox cookies goes down.

　

　

　

　

　

　

　

　

　

　

　

　

　

　

　

Due to a disastrous growing season, the price of cocoa triples.

　

　

　

　

　

　

　

　

　

　

　

　

　

　

　

　

　

) The American Association of Cookies Lovers designates the Oreos as its official cookies.

　

　

　

　

　

　

　

　

　

　

　

　

　

　

　

　

　

　

　

　

　

　

　

　

　

　

　

(d)The Oreos Cookies Company computerizes their Oreos manufacturing plant, lowering unit costs of production.

　

　

　

　

　

　

　

　

　

　

　

　

　

　

　

　

　

　

　

　

(e ) A severe recession reduced dramatically households’ income.

　

　

　

　

　

　

　

　

　

　

　

　

　

　

　

　

　

　

　

　

　

　

　

　

　

　

　

　

2. Suppose that initially the gasoline market is in equilibrium at a price $2.00 per gallon and a quantity of 45 million gallons per month.

Then the war in the Middle East disrupts imports of oil into the United States., shifting the supply curve for gasoline from S1 to S2.

The price of gasoline begins to rise and consumers protest. The federal government responds by setting price ceiling of $2.00 per gallon. Use the graph below to answer the following questions

　

　

　

 

Assume that demand curve intersects vertical axis at the price $9 and S2 curve intersects vertical axis at the price $1, S1 at the price $.50

All underlying work must be shown

When the war in the Middle East disrupts imports of oil into the United States and there is no price ceiling on gasoline

a. What would the dollar value of the total consumer surplus be?

　

　

　

　

　

　

　

　

b. What would the dollar value of the total producer surplus be?

　

　

　

　

　

　

What would the dollar value of deadweight loss be?

　

　

　

　

B. No assume that a price ceiling is imposed and there is no black market in gasoline.

a. What is the price of gasoline, the quantity of gasoline demanded, the quantity of gasoline supplied with the price ceiling?

　

　

　

　

　

　

b. Calculate the dollar size of total consumer surplus with the price ceiling.

　

　

　

　

　

　

c .Calculate total producer surplus with the price ceiling

　

　

　

　

　

　

　

d.Calculate the dollar size of deadweight loss at the price ceilings if present

　

　

　

　

　

e. Are all consumers made better off by the price ceiling? Explain

　

　

　

　

　

　

　

　

f. If the government removes the price ceiling, will the market efficiency increase or decrease? Why and by what dollar amount?

　

　

　

　

　

　

3. Calculate price elasticity of demand on each of the following demand curve:

A. Calculate elasticity on Demand curve D1, price changes from $20 to $10 and quantity demanded increases from 700 to 900 units

　

　

　

　

　

　

　

　

　

　

B. Calculate elasticity on Demand curve D2, price changes from $18 to $14 and quantity demanded increases from 5,000 to 9,000 units

　

　

　

　

　

　

　

　

C. Calculate elasticity on Demand curve D 3, price decreases from $32 to $24 and quantity demanded increases from 70 to 100 units

　

　

　

　

　

　

D. Explain if demand on each demand curve between the given price range is elastic, inelastic, unit elastic and why.

　

　

　

　

　

　

　

　

E. If price increases by 10 percent on each demand curve, by how the quantity demanded will change (increase or decrease) on each demand curve?

　

　

　

　

　

　

　

　

F. If business objective is to increase total revenue, how it should use the price elasticity of demand on D1, D2, D3 while preparing pricing strategy?

　

　

 

　

　

　

　

　

　

Attachments:

• 1504339817-econn.doc