Economics 204

Chapter 6

1. The price of Hall & Oates vinyl records increased by 42%, and the quantity demanded consequently decreased by 14%.

1. Calculate the price elasticity of demand using the basic formula that utilizes the absolute value of percentage changes in quantity demanded and percentage changes in price.

2. Based on your calculation, the price elasticity of demand for Hall & Oates records is

   1. Perfectly Elastic.

   2. Elastic.

   3. Unit-elastic.

   4. Inelastic.

   5. Perfectly Inelastic.

2. The price of gold-encrusted Hello Kitty trapper keepers fell from $4,000 to $3,400. As a result, the quantity demanded increased from 15,000 to 17,000.

a. Use the midpoint formula to calculate the price elasticity of demand.

b. Based on your calculation, the price elasticity of demand for Hello Kitty trapper keepers is

1. Perfectly Elastic.

2. Elastic.

3. Unit-elastic.

4. Inelastic.

5. Perfectly Inelastic.

3. The price of Skagen watches falls by 6%, and the quantity demanded of Banana Republic jackets increases by 21%.

1. Calculate the cross-price elasticity of demand for Banana Republic jackets for a decrease in the price of Skagen watches.

2. Based on your calculation, the cross-price elasticity of demand between Skagen watches and Banana Republic jackets reveals that the two goods are

   a. Substitutes.
   b. Complements. c. Unrelated.

4. Your income increased by 40% due to signing a new record contract. Consequently, your quantity demanded for custom, iced-out chains increased by 360%.

1. Calculate the income elasticity of demand.

2. Based on your calculation, the income elasticity of demand for your bling is

   1. Normal and necessary.

   2. Normal and luxury.

   3. Inferior.

5. You absolutely love to play piano, and you would perform a given number of concerts a week regardless of the price you were paid for your services. Your price elasticity of supply is

a. Perfectly Elastic. b. Elastic.
c. Unit-elastic.
d. Inelastic.

e. Perfectly Inelastic.

6. The price of Creamsicle Bars was originally $0.90, and the quantity demanded was 375,000. The price increased to $0.95, and the quantity demanded fell to 350,000. Calculate the price elasticity of demand using the basic formula that utilizes the absolute value of percentage changes in quantity demanded and percentage changes in price. Show your work. Then, label your answer as perfectly elastic, elastic, unit-elastic, inelastic, or perfectly inelastic, showing why you chose your answer.

Chapter 9

1. Leopold “Butters” Stotch (hereafter referred to as Butters) works as Paris Hilton’s pet bear. He is considering a binary choice today. Starting from now, Butters’ lifetime earnings as a pet bear will be $10,000,000. His lifetime expenses in this job will be $50,000 in dry cleaning of his bear suit, $200,000 in food (because Paris only gives him bear food), and $3,000,000 in costs associated with failed escape attempts. Instead, Butters could become an author; not just any author, but the genius voice of our generation who changes literature as we know it (like Kanye or Pitbull, but for books). His lifetime earnings as an author would be $8,000,000. His expenses for this job would be $20,000 in materials and office equipment, along with $500,000 for a rural home in which to work and live. He would have to borrow the money for those expenses, and he would have to pay back $10,000 in interest. Finally, while he is unemployed and working on his first novel, he could be earning $500,000 working as Paris Hilton’s pet bear.

1. What is Butters’ accounting profit of being Paris Hilton’s pet bear (show your work)?

2. What is Butters’ accounting profit of becoming an author (show your work)?

3. What is Butters’ economic profit of being Paris Hilton’s pet bear (show your work)?

4. What is Butters’ economic profit of becoming an author (show your work)?

5. Butters must make a binary choice. Should he be Paris Hilton’s pet bear, or should he become an author? Why should he make that choice?

2. Yamaha produces a wide variety of pianos. Below are their marginal costs and marginal benefits for producing various quantities of the C3 Grand Piano. Examine those two charts in order to fill in the third chart and answer the questions below.

Total Costs for a Yamaha C3 Grand Piano

Total Benefits for a Yamaha C3 Grand Piano

a. Fill in the table below given the information in the above two charts so you may answer part b.

b. First, what two things should a firm equalize when determining its quantity? In other words, a firm will produce at the intersection of what two curves? Second, what quantity of C3 Grand Pianos will Yamaha produce?

3. You spent $45 on a ticket to see Louis C.K. perform standup at a theater in Tampa. Your friend calls you up immediately before the show and offers to take you to see a Bruno Mars show instead. She has an extra ticket that you can use, and you think Bruno Mars with your friend sounds like more fun than dark comedy alone. Louis C.K. doesn’t allow people who purchase tickets to his concerts to resell them. What should you, as an economic agent, do?

1. Go to the Louis C.K. concert because you spent $45 on it.

2. Go to the Bruno Mars concert because the $45 you spent is a sunk cost.

3. Stay home and cry into a bucket of half-melted chocolate ice cream.

Chapter 10

1. You missed your fry up (your usual meal of eggs, beans, toast, tomato, pudding, tea, etc.) for breakfast, and you’ve been working from early in the morning until midday. You are hungry for lunch, and you have £12 (twelve British pounds) to spend. An order of mushy peas costs you £2, and an order of chips is £1. Given your budget constraint of £12, you can buy, at maximum, either 6 orders of mushy peas or 12 orders of chips. You are a utility-maximizing agent.

Mushy Peas

Chips

1. How many orders of peas do you buy (fill in the price and MU/P columns to get you started)?

    

    

    

    

2. How many orders of chips do you buy (fill in the price and MU/P columns to get you started)?