Economics 101-Principles of Microeconomics

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Economics 101-Principles of Microeconomics Homework 2-Professor Wallace, Spring 2017

Put the name of each member of your group on your homework. Turn in one copy of the homework for your group. Due no later than 5:00 p.m. on Thursday, 2 April.

1. (40 points) The table shows a list of events. Each event affects the market indicated. In each case you should show the effects of the event on demand (D), supply (S), the equilibrium price (P), and the equilibrium quantity (Q). The events are independent in the sense that an event listed in one row of the table does not affect the market in a different row. Be sure to take into account the information given about the elasticity in each problem before answering. + i n c r e a s e o r s h i f t r i g h t , - d e c r e a s e o r s h i f t l e f t , U u n c e r t a i n e f f e c t o r s h i f t , 0 n o e f f e c t o r s h i f t

M a r k e t i n K u w a i t E v e n t D S P Q

Fried chicken Income increases (εy < 0)

Fish in the Market The number of buyers decreases

(εs = 0)

Salt The costs of production decrease

(εd = 0)

Sugar Price of tea increases (εc < 0) and a

drought reduces the production of sugar cane (from which sugar is produced)

Cars Price of trucks increases (εc > 0) 2. (32 points) The equations shows kilos of coffee demanded and supplied in Salmiya on a typical Saturday. 𝑄! = 500 − 50𝑃 𝑄! = 100𝑃 − 250

a. Using the point elasticity measure, calculate the following price elasticities of demand and indicate whether your result shows that demand is price inelastic, price elastic, or unitary elastic.

i). Price of 8 KD. εd = ________. Inelastic, elastic, unitary (circle one) ii). Quantity demanded of 400. εd = ________. Inelastic, elastic, unitary (circle one) iii). Price of 5 KD. εd = ________. Inelastic, elastic, unitary (circle one).

b. Use the arc elasticity measure to calculate εd as price rises from 6 KD to 8 KD. εd = _______ Inelastic, elastic, unitary (circle one)

c. Using the point elasticity measure, calculate the following price elasticities of supply and

indicate whether your result shows that supply is price inelastic, price elastic, or unitary elastic.

i). Price of 8 KD. εS = ________. Inelastic, elastic, unitary (circle one) ii). Quantity supplied of 50. εS = ________. Inelastic, elastic, unitary (circle one) iii). Price of 5 KD. εS = ________. Inelastic, elastic, unitary (circle one)

d. Use the arc elasticity measure to calculate εs as price rises from 6 KD to 8 KD. εs = _______ Inelastic, elastic, unitary (circle one)

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3. (14 points) The table shows the total utility Paco receives from eating muffins every day. Utility, in this problem, is measured in units of satisfaction called utils. More utils means more satisfaction. Fill in the blank spaces for total and marginal utility in the table.

Muffins Total Utility Marginal Utility 0 0 --- 1 50 2 36 3 24 4 130 5 6 9 7 159 5

4. (14 points) Use the information provided in the table to answer the questions that follow.

I n p u t s R e q u i r e d t o P r o d u c e a P r o d u c t U s i n g A l t e r n a t i v e T e c h n o l o g i e s

Refer to the table. If the hourly wage rate is 10 KD and the hourly price of capital is 50 KD, which production technology should be selected? Circle one answer. a. A b. B c. C d. D Refer to the table. If the hourly price of labor is 10 KD and the hourly price of capital is 12 KD, which production technology should be selected? Circle one answer. a. A b. B c. C d. D