ECON 2 Problem Set 2

Question 1. The figure shows a market in which a $22 price floor has been imposed.

a) At the price floor, what is the quantity supplied?

b) At the price floor, what is the amount of the resulting surplus?
c) At the price floor, the quantity demanded has fallen by _______ units below what it would have
been in equilibrium.

d) What is the amount of the resulting deadweight loss (do not calculate it explicitly)?
2. When the price of a pizza is $22, the Equinox Pizza Emporium sells 27 pizzas per hour. When the
price is lowered to $18, they sell 35 pizzas per hour. Use these numbers to calculate the elasticity of
demand for the Equinox Pizza Emporium, according to the midpoint formula.

3. If the price elasticity of demand for oranges is 0.65, then the demand is elastic/inelastic and total
revenue will increase/decrease if the price of oranges increases.

4. For inferior goods, what can you say about the income elasticity of demand?

5. Suppose that a $2.50 excise tax is imposed on printer ink cartridges. If the total number of ink
cartridges sold per year falls from 325 million to 310 million in response to the tax, how much tax revenue
will be collected?

6. The burden of an excise tax falls mainly on consumers when the price elasticity of demand is _____
and the price elasticity of supply is _____.

7. According to the HeckscherOhlin model, a country that has an abundant supply of labor will have a
comparative advantage in _________.

8. The figure shows the production possibilities curves for the U.S. and Mexico in the production of
refrigerators and tractors.

a) Who has the absolute advantage for the production of tractors?

b) In Mexico, what is the opportunity cost of each tractor produced?
c) If each country specializes according to its comparative advantage, what will be the outcome?
9. The figure shows the domestic supply and domestic demand for copper. Both the autarky price and the
world price are indicated. How much consumer surplus is lost due to international trade?

10. Sergio has $15 to spend on two goods: DVD rentals and cherry sodas. The price of each DVD rental
is $3, and the price of each cherry soda is $1. His utility function values for each of these two goods are
given in the table above. What is Sergios marginal utility from the third DVD rental?

a) What is Sergios marginal utility from the third DVD rental?

b) What is Sergios marginal utility from the third cherry soda?
c) At Sergios optimal consumption bundle, how much will he be spending on DVD rentals?

11. According to the optimal consumption rule, a consumer will maximize utility by _____.
A. spending as little money as possible.
B. consuming at the point at which marginal utility is maximized.
C. consuming at the point at which marginal utility per dollar spent is the same for all goods.
D. choosing a consumption bundle in which the amount spent on all goods is the same.

12. Which of the following would cause a decrease in the supply of wool sweaters?
A. Higher prices of wool
B. Lower prices of wool
C. Improved technology in knitting wool sweaters
D. Lower prices for wool blankets, a substitute in production

13. Assuming that ice cream is a normal good, which of the following could cause an increase in the
demand for ice cream?
A. A decrease in incomes
B. A sudden spell of unexpectedly cold weather
C. An increase in the price of complements for ice cream, such as cherries and flavored toppings
D. An increase in the price of substitutes for ice cream, such as frozen yogurt

14. The incidence of an excise tax is determined by

A. who officially pays the tax.

B. the relative elasticities of supply and demand.
C. whether the good is normal or inferior.
D. how many consumers are in the market for the good.

15. Suppose we have a demand equation (D:) P = 100 and a supply equation (S:) P = Q.
a) Calculate, for these equations, equilibrium price, quantity, consumer surplus, and producer
surplus.
b) Suppose that the government imposes a quota: Q=40. Calculate the equilibrium price, quantity,
consumer surplus, and producer surplus for the market with the quota.
c) How does the quota affect welfare (in terms of consumer and producer surplus)?
d) Suppose that, instead of a quota, the government imposes a price ceiling P = 40. Calculate the
equilibrium price, quantity, consumer surplus, and producer surplus for the market with the quota.
e) How does the price ceiling affect welfare (in terms of consumer and producer surplus)? Which is
better, the price ceiling or the quota?