ANSWERS 1 The Market 12a. 18 12a. 18 12a. 18 1.2a. 18 1.2a, 25 12a. 25 1.2a. 25 12a. 25 12a, 15 12a, 15 12a, 15 12a, 15 1.2a. 18 12a. 15 12a, 18 12a, 18 1.2b, 18. 1.2b, Yes. 14a. E, who is willing to pay only $10 for an apartment would sublet to F, who is willing to pay $18. 14b. $18. 1c. A,B, C, D, F. 1.4d. It’s the same. 2 Budget Constraint 24a, $100. 26a. 2P+4M +6J = 360. 2.6b. 2 crowns. 2.6c. 3 crowns. 2.6d. 180 crowns. 26c. P-+2M +3J = 180. 2.6e. No. 28a, 15X —1P—2A = 50. 2.10a. 150 pages. 2.10b. 50 pages. 2.12b. The blue budget line lies strictly outside the red budget line, so to satisfy both budgets, one must be strictly inside the red budget line.‘AZ ANSWERS 3 Preferences 3.2b. Yes. 3.20. -2/3. 3.2d. —1. 3.2e, -2/3 3.2e. -1. 3.26. Yes. 3.2g. Yes. 3.4a, 2. 3.4c. Yes. 3.4d. No. 3.4e. No. 3.4f. Line segments with slope —2.5. 3.6a, Yes. 3.8a. (20,70). 3.8. No. 3.8d. (60,50). 3.8e, Yes. 3.10a, $10. 3.10b. $12. 3.1da, Goldilocks. 3.14b. Grubs. 3.14c, Grubs versus Goldilocks, then Honey versus the winner. 3.14d. No. 4 Utility 4.0.2 4.0.3 4.0. -2/3 4.0.4 4.0.6 4.0. -2/3 40.4 4.0. 6 4.0. ~a/b 4.0. Se 40.0 1 40. Fe 40. 1/21 40.1 4.0. ~1/a1 4.0. v'(a1) 4.0.1 4.0. -v/(e1) 4.0. 22 4.0. 21 4.0: = 20/21 4.0. axt1z5 4.0. bated”ANSWERS A3 4.0. A 4.0. 2g+1 4.0. 2142 40. (2) 4.0. t2+b 40. 2,+¢@ 4.0. — (zt (82) 4.0. anf 4.0, axg* 40. -()° 42a. 14. 4.2b, No. 4.20. 2/3. 4.20. -2/3. 42d, ~2/ fa. 42d. xg 4b. 10. 4.4b. 10. 4d. No. 46a, u(X,Y) =X +2Y. 4.6b. u(X,Y) 4.6c. Yes. 4.6c. Yes. 4.6c. No. 4.6d. Shirley prefers (0,2) to (3,0). Lorraine disagrees. 4.8a. (10,10). 48a, More women. 4.8a. More women, 4.8b, Worse. 4.8c, 22. 480. 13, 48d. V. 4.10c, Yes. 4.10c. Yes. 4.10d. There is no difference. 4.10e. Their utility functions only differ by a monotonic transformation. 4.12a, —1. 4.12b. -1. 4.120. Yes. 4.12c. Notice that u(sa, 22) = [o(z1, 22)? 4.14a. (0 +y)(0 + dy) /100. 4.14b. 20 4.14e. Greater than. 4.1dc. Yes. a1‘Ad ANSWERS 5 Choice 52a. 85-1. 5.2b. Yes. 5.2c. — $45. 5.2d. $45 5.20. X+Y¥ BOE 5 5.2. 6. Bab. 11 = 29. 5.4c. 10a, + 20x. = 1,200, 5.4d. (40,40). 5.de. 400 Bde. 800 56a. 4. 5.6b. 4, 5.6c, 4. 5.6L c= y. 5.6. (4,2). 5.6h. 1,150. 5.10a. C+ X = 70,000. 5.10b. (30,000, 40,000). 5.10c. (30,000,30,000) 5.10d. .5C-+X=60,000. 5.10e. 20,000 5.10e. 50,000. 5.108. —.5. 5.108. -1. 5.120. (80,8). 6 Demand 62a, —22/321. 6.2b. 2/3. 6.2b. 2/5. 6.2c. a/(atb). 64a. 1/t = pi/Ps- GAD. t(PsPts™) = Pa/Pe- 6.4c. Ps 6.44. 64e. s=6" 6.4e. t= m/pe 6.4f, Yes, 6.6a. 8 units. 66a. 16 units. 6.6. 5. 6.8b. 20/2 = 3/1. 6.8b. 3 6.8b. 3.5 6.10a. A substitute. An increase in the price of ale increases demand forG.10b. ge = 120 ~ 30p-. 6.10c. pe = 4~ 9e/30. 6.10c. $3. 6.10d. pe = 5 — ge/30. 6.12a. Yes, 6.128. pie. 6.12a. AS 6.12a. P,S 6.12b. arpipy- 6.12b. sep 6.120. s5bo5- 6.124. 1/2. 6.124, Less than half. 7 Revealed Preference 72a, $30. 7.2b. Yes. 7.2b. -1/2. 7.2c. 45 pounds. 7.2d. $45. 7.2e. No. 7Ab. Yes. 7.6a. 30 76a, 33 76a. 16 7.6b. No. 7.6b. D 7.6b. I 7.6b. I 7.6b. D 7.6b. I 7.6c. Yes. 7.8b. McAfee. 7.8c. Falklands. 7.10a, 49.0 7.102. 68.3 7.10a, 63.1 7.40, 91.1 T.-L0b. Yes. 7.10c. 1.39. 710d. 1.44. 7.10e. 1.29. TOE. 1.39 7.10g. .69 7.12a, Exactly 2. 7.12a, Exactly 2. 7.12b. Yes.AG ANSWERS 7.12b. Yes, by 50%. Everybody's budget line shifted out by 50%. With homothetic preferences, the consumption of each good increases in the same proportion. 8 Slutsky Equation 8.2a. 90. 8.2b. 8,400 pounds. 8.2b. 88 bottles. 8.2c. 70 bottles. 82d. 20. 8.2d. reduced 82d. 2 8.2d. reduced 8.2d. 18 bottles. 8.4a. Yes. 8.da, All due to income effect. 8.4d. $120. 8.4e, All substitution effect. 86. 80 8.6. 100. 86a, 920. 8.6a, 92. 8.6b. 80 8.6b. 92. 8.6b. 92 8.6b. 100. 88a. Worse off. 8.8a. Better off. 8.8b. He is better off in May than in February. 8.8c. No. 8.10b. 2m; +-1m = 200, my +m = 1,500. 8.10c. 1,000. 8.10d. 666.66. 8.10d. No. 8.10d. Yes. 9 Buying and Selling 9.2a. $200. 9.2b. 20 9.2b. 20 9.2c. $300. 9.2c. 15 9.2c. 15 9.2d. 10 9.2d. 10 9.20. 0. 9.2e. —10. 9.2e. +5. 9.2e. -5.ANSWERS A7 9.4. No. If p; falls, then with the new budget, she can still afford her old bundle. She could afford the bundles with less of good 1 than her endowment at the old prices. By WARP, she won't choose them now. 9.6c. The same. 9.8a. 50 9.8. $300. 9.8a. $5 9.8c. $150. 9.8d. 30 9.8d. 20 9.10b. Shorter. 9.10c. longer 9.10c. more 9.10c. shorter 9.10c. endowment income 9.10c. Substitution and endowment income effects cancel each other out, so the workweek stays roughly constant. 9.10d. 39 9.10d. 20 9.10d. understates 9.10d. more 9.12a, 40. 9.12b. 40 9.12b. 160. 9.12¢. e+ 4r = 320. 9.12¢. e+ Gr = 400. 9.12d. 40 9.12d. $160 9.12e. Yes. 9.12e, (200, 33.3). 9.126. 46.6. 9.12f. Mac. 10 Intertemporal Choice 10.2. cy + ¢2/(1 +r) = mi +m2/(1 +r). 10.2b. 1. 10.2b. 1/(1 +r). 10.2b. mi +ma/(1 +7). 10.2c, .27m1 + .2m2/(1 +r). 10.2c. .8(1+r)my + 8m. 10.2d. decrease 10.2d. increase 10.2d. increase 10.4a. False. Substitution effect makes him consume less in period 1 and save more. For a saver, income effect works in opposite direction. Either effect could dominate. 10.4b. True. The income and substitution effects both lead to more consumption in the second period. 10.6b. 710.8%.‘A. ANSWERS 10.6b. 7.1%. 10.6c. 6% 10.60. 5.79%. 10.6c. ~87.3% 10.6c. —21.57%. 10.6c. 677.7% 10.6c, 710.8% 10.6¢. 5.7 10.6¢. 5.5 10.60. 10.6c. 10.6c, 10.6c. 10.6c. 10.6c. 10.6¢. 10.6c. 10.8a, Stay the same. His demand for c1 is .5(mz + m2/(1 +7) and m2 =0. 10.8b. More. He saves the same amount, but with higher interest rates, he gets more back next period. 10.8c. Less. 10.10b. 600 bushels. 10.10b. 100 bushels. 10.10b. 450 bushels. 10.10c. 568 bushels 10.10c. 624 bushels. 10.12a. Yes. 10.12c. No. 10.12c. Yes. 10.12c. No. 11 Asset Markets 11.0a, I+r 11.0a, Ltr 1L.0b. 1 11.0b. 1/(1 +r) 11.0. X/(1+7) 11.0e. X/(1+7) 11.04. —X/(1+r) 1.0e. X/(L +r)? 11.08. X,/(1+r)t 11.0g. Xi/(1 +r) + X2/(1 +7)? + Xio/(1 +r)” 1L.0h. X/r 11.0. X/r 0. DE, XV +r geometric 0. X/r. 11.0}. $909.ANSWERS AS. 11.0}. $10,000. 11.0k, —550/(1.1) + 1,210/(1.1)? = 500 11.2a, The present value of $50,000 a year for 20 years is less than $1,000,000, since the present value of a dollar received in the future is less than $1. 11.2b. $10. 11.2¢, $500,000. 11.24. 500,000 11.2<, $75,000. 11.2f. 8.50 x 50,000 = $425, 000. 114. 75 14a, 75 years. 11.4b. 100 years. 11.6a. $200. 1L.6b. $200. 11.6c. 6 years. 11.6d. $500 per case. 11.6. $500/1.1%. 18a. pp - 5. TL 8b. pry — 5. U8e. (pep — 5)/(1 +r). IL8e. (pe — 5)/(1 +r). 118d, The present values must be equal. 18d. Air = PSH. 11.Be. pry = (1+1)p — Sr. 1L8f. The percent change in price is smaller. 11.10a. $450. 11.10a. $600. 11.10. $3,000. 11.10b, 450 — 300 = 150. 11.10b. 600 - 500 = 100. 11.10b. 3,000 — 7,500 = —4,500. 11.10e. A. 11.104. B. 11.10e. B. 11.10e. C. 11.10f. $900. 11.108. $1,200. 11.108. $6,000. 11.108. B. 11-108. C. 11.12a, Some might say that economics, like accounting or mortuary science, is so boring the pay has to be high to get you to do it. Others would suggest that the ability to do well in economics is scarce and is valued by the marketplace. Perhaps the English majors and psychology majors include disproportionately many persons who are not full-time participants in the labor force. No doubt there are several other good partial explanations. 11.12b, $596,000.ATO ANSWERS 11.12b. $630,000. 12 Uncertainty 12.2a, (50, 000, 500, 000). 12.2b, 50,000 + .9z. 12.2b. 500,000 — -12. 12.2¢, «1 12.2c. 455,000. 12.24. = -9, 12.2d. eye/er = 1. 12.2e, (455,000, 455,000). 12.2e. $450,000 12.2e. $45,000. 24a. 70.71 124a, 100, 12.4b. 122.5, 12.4b. 100. 12.4b, take 124¢, 100 = 12.4c. 40,000. 12.44. 40,000. 124e. 12.46. 12.6¢. 12.6e. The price is 1. 12.8a, w= } Ines + 3 lnc. 12.8b, Morgan’s utility function is just the natural log of Sam's, so the answer is yes. 12.8. 20 12.8¢. 20 12.8c. This is the same as Sam’s consumption. 12.10a. 300 12.10a. 150 12.10c. $250. 12.10c. $200. 12.12a. $498. 12.12b, $248,004. 12.12c, $248,400. 12.12d. $248,400 12.12d. 248,800. 13 Risky Assets 13.2a. rz = 30x + 10(1 ~ 2). 13.2b. o2 = 10x. 13.2c. The budget line is rz = 202 +10. 13.26. 20 13.20, 5. 13.2g. Using the answer to Part (a), we find an ¢ that solves 20 = rz = 302 + 10(1 — 2). The answer is z = 5. 13.40. 10%,ANSWERS AIT 13.4a. 10%. 13.4b. 10%. 13.4b, 0%. 13.4c. He should choose the second pasture since it has the same expected return and lower risk. 14 Consumer's Surplus 14.2a. A,B,C,D. 14.2b. 20. 14.2b. 5. 14.2. 50. 14.2d. 130. 14.26. 0. M4.2f. 4. 14.4a. 20. 14.4b. 30. 14.4e. 30, 144d. 40. 14.4e. lower. 14.6a. 1/(¢ +1) = pe. 14.6b. quasilinear 14.6b. x = 1/pz —1. 14.6b. y=m-—1tp. 14.60. 3 14.6c. 9.25 14.6¢. 10.64. 14.64. $10.64. 14.6e. 1 14.60. 9.5 14.62, 10.19. 14.6f. $10.19. 14.63. -.45 14.6g. 8.25. 14.8a. $200. 14.8a. $100, 14.8b. At price $10, consumer’s surplus is $100. At $14, he demands 8 burgers, for net consumer's surplus of }(16 x 8) = 64, The change in consumer's surplus is ~$36. 14.100. $15 14.10b. 10 hours. 14.10b. $20. 14.10¢. 0 hours. 14.10, $30, 15 Market Demand 15.03. —p/(60 —p). 15.0b. —bp/(a — bp). 15.0c, ~2. 15.0. -b. 15.0e. -2p/(p + 3).A12 ANSWERS 15.0f. —bp/(p +a). 15.2a. 15.2b. 15.20. 15.24. 15.4a. 15.4a. 15.4a. 15.4b. 15.4b. 15.4b. 15.4e. 15.4e. 15.6a. 15.6a. 15.6a. 15.8. 15.8b. p(q) = 5-4/2 ifq < 10. 10, 000/q. (q) = (10 ~ Inq) /4. 2(0) = V20/4. —3. -4, 1. (m—pit+12=m+1. p=(m+1)/2. $1. 5. Q=5. 15.10a. 9,900. 15.10b. $250,000. 15.10b. $250,000. 15.10c. 150,000 seats. 16 Equilibrium 16.2a. 16.2a. 16.2b. 16.2b. 16.2b. 16.2c. 16.2d. 16.4a, 16.4a. 16.4b. 16.4b. 16.4b. 16.40. 16.6a. 16.6b. 16.6b. 16.6d. 16.6d. 16.8a. 16.8b. 16.8b. 16.8¢. 16.8¢. 16.8d. 15 25. 20. 30. $10. $10. $25. $20 100. $21 $19. 95. 5=2x 5/2. ‘The equations are 200—4Ps—2P;, = 100 and 200~3P,~Ps = 150. 20 10. 23 9. It would rise by about 2% a year. 400. 400. 2 15%. It would double if demand didn’t change.ANSWERS A13 16.8e. Since the demand has elasticity of —1, the revenue would stay the same. 16.8f. They would recover to their old levels. 16.10a. 3. 16.10a. 9 cents. 16.10b. 3.5. 16.10b. 9.5 cents. 16.10b. 7.5 cents. 16.10c. -16.66%. 16.12c. $3.00 16.12c. $15 million 16.12c. There is no effect. 16.12c. Gasoline suppliers gain and government loses $15 million per day. 16.124. Q=120 ~ 15P* + 120 ~ 15(P* + $0.10). 16.12d. $2.95 16.12d. P* = $3.05 16.12d. $2.95 16.12d. Increases consumption by .75 million gallons in states that remove tax and decreases consumption by .75 million gallons in states that do not. 16.12e. Gain from 5 cent price reduction. 16.12e. Lose from 5 cent price increase. 16.12e. Gain from 5 cent increase in revenue per gallon. 16.12e. Lose $15 million per day in revenue. 16.12e. Because consumption falls by 0.75 million gallons per day, they lose $75,000 per day. 17 Auctions 17.2. 1/4. 17.20. 1/4, 17.2a. 1/2. 17.2b. 3/4. 17.2b. 1/4. 17.2b. (3/4) x $6,000 + (1/4) x $1,000 = $4,750. 17.2c, $4,500. 17.24, $6,000. 17.2d. $6,000. 17.2d. Professional bids $6,000. Recreational user bids $4,500. 17.2d. The professional. 17.2d. $4,500. 17.2d. $4,500. 17.2d. $4,500. 17.24, (1/4) x $6,000 + (3/4) x $4, 500 = $4,875. 17.2e. Method 3.14. ANSWERS MTAa. 5375 17.4a. C 174a. $3,000 + (C/2). 17.4b. C < $4, 750. 17.4c. None. 17.4d. C > $4, 750. 17.6a. 7/10. 17.6a. $100. 17.6a, $70. 17.6b. 6/10. 17.6b. $200. 17.6b. $120. 17.6c. 2/1,000 17.6c. $800-x 17.6¢. $(800 — «)(z/1, 000). 17.6c. z = 400. 17.6d. $(V = z)(x/1,000) 17.6. 2 =V/2. 17.8a. common 17.8b, 450. 17.8b. 300. 17.8b. 750. 17.8b. 450/750=3/5. 17.8¢. 3/5. 17.8d. 0. 17.8e. 3/5 x 1,000 + 2/5 x 100 = $640. 17.8e. $100. 17.8f. $550. 17.8g. No. 17.8h. $100. 17.8h. Lose money. 178i. $100. 17.8}. Al will get all of the good cars and he will pay $100 for them. 17.8k. $540. 17.10a. 8H. 17.10a. $L. 17.10b. $H. 17.10b. $L. 17.10c. 1/2. 17.10. 1/2. 17.10c. $(H + L)/2. 17.10d. 1/8. 17.10d. (H ~ L)/8. 17.10e. (3(H — L)/8) + ((H + L)/2) = (7/8)H + (1/8)L. 17.12a, $H — L. 17.12a. 0 17.12b. $H — L 17.12b. 0 17.12b. 0ANSWERS AIS, 17.12, $L 17.12. $H - L 17.12e, HL 17.124. 7( HeL)/8 18 Technology 18.0. 1 18.0. 2 18.0. ~1/2 18.0. a 18.0. 18.0. —a/b 18.0. 5022AT6 ANSWERS, 18.0. D 18.0. D 18.0. D 18.0, C 18.0. D 18.0. D 18.2a. 1 18.2a. remains constant 18.2a. 0 18.2a. remains constant 18.2a, infinity. 18.2a, constant 18.2b. 0. 18.2b. 0. 18.2b. increase 18.4a. decreasing 18.4a, constant 18.a, 24 +4B = 160. 18.6b. 44+ 2B = 180. 18.6d. 2A + 4B = 160 and 4A + 2B = 180. 18.6e. 45 units. 18.6e. Workers. 18.62. 70. 18.8. For any t > 1, f(ta,tz2,t73) = A(tay)*(ta2)>(tas)° = w*OF F(x, 29,09) > tf (502,73). 18.10a. ab <1. 18.10a. ab = 1. 18.10a. ab > 1. 19 Profit Maximization 19.2a. r= 400/% — 50z. 19.2b. 16. 19.2b, 16. 19.2b. $800. 19.2c. 16, 19.2¢. 16. 19.2c. $640. 19.2d. © = .50 x (400\/r — 50x). 19.2d. 16. 19.2d. $400. 19.4a. 200, 194a, 400. 19.4. 300. 19.4b. 300. 19.4c. An infinite number. 19.4c, 250. 19.4e. 200 19.4e. 0 19.4e. $1,000.ANSWERS AIT 19.6b, $80 million. 19.6b. $60 million. 19.6c. No. The data satisfy WAPM. 19.6d. Yes. When price of gas was $40, Golf could have made more money by acting as it did when price of gas was $20. 19.8a, Yes. If price of input doesn’t change, Aw = 0, so WAPM says Apdy > 0. 19.8b. Yes. If price of output doesn’t change, Ap = 0, so WAPM says —AwAz > 0. 19.8c. No. Sign pattern is (+)(—) — (+)(+) 2 0, which cannot happen. 19.10a. 227 1/72¥/* = wy 19.10a. 23/?23°/* = we. 19.10a. 8/(wwa) 19.10a. 4/(w?w3). 19.10b. 1. 19.10b. 1. 19.10b. 1. 19.10b. 1. 19.12a. 0 19.12a, 16/9 19.12a. 8/3. 19.14b. $80 million. 19.14b. $60 million. 19.14c. No. The data satisfy WAPM. 19.14d. Yes. When price of gas was $40, Golf could have made more money by acting as it did when price of gas was $20. 19.16a. Yes. If price of input doesn't change, Aw = 0, so WAPM says ApAy 2 0. 19.16b. Yes. If price of output doesn’t change, Ap = 0, so WAPM says —AwAz > 0. 19.16c. No. Sign pattern is (+)(—) — (+)(+) 2 0, which cannot happen. 20 Cost Minimization 20.2b. Constant. 20.2c. 10 units. 20.2c. 5 units. 20.24. It can only produce 10 units of output by using the bundle (10,5), so this is the cheapest way. It will cost $15. 20.26. c(w1, wa, 10) = 10w: + Sw2. 20.2f. (wy + w2/2)y. 20.4, Decreasing. 20.4b. wy/w2 20-40. wil 24/2 fr? 20.40. wi/#y8/2/wh/?, 20.4d. 2w!/?wh/?y9/2, 20.6a. 1/2 unit of water. 20.6b. (4,2). 20.60. AAT8. ANSWERS 20.6c, h/2. 20.6d. wyh+ “Bh. 20.8b. $2,000. 20.8b. $2,500. 20.8b. $3,000. 20.8c. There is no such evidence, since the data satisfy WACM. 20.8d. $2,000. 20.8d. $3,500. 20.8d. $2,500. 20.8e. No. At prices (20,10), this bundle costs less than the bundle actually used at prices (20,10). If it produced as much as that bundle, the chosen bundle wouldn’t have been chosen. 20.10a. Increasing. 20.10b. 12, 20.10b. 12w. 20.10c. 20.10c. wy. 20.10d. w/ V7. 20.12b. Decreasing returns to scale. 20.12c. (8,0). 20.12c. $8, 20.124. (18,0). 20.12d. $18. 20.12e. y?/2. 20.128. y?, 21 Cost Curves 21.2. 2s, 21.2. 10. 21.2, 2s. 21.2. 10/s. 21.2. 28+ 10/s. 212. 4s. 21.4b. 500. 21.4b. $2. 21.4c, MC = y/500 214e. AC = (1,000/y) + y/1,000. 21.4e. 1,000. 21de, $2. 21.6. Q*/?. 21.6b. 2Q%/ + 100. 21.6c, 8Q'/3/3, 21.6d. 2Q¥3 + 100/Q.ANSWERS 19 21.8a. AC = 4y +38. 21.8b. MC =&y. 21.80. y =2. 21.84. AVC = 4y. 21.8e. At y=0. 22 Firm Supply 22.2a. 3y? — 16y + 30. 22.2b. y? — 8y +30. 22.2d, 4 22.2d. 4. 22.26. 4. 22.26. 14. 22.28, 4. 22.2g. 42. 22.da, 2y. 22.4a. y + 10/y. 22.4b. V0. 22.4b. VIO, 22.40, 2/10. 22.4c. VIO. 22.6a. 8. 22.6b, 8 hours. 22.6c. p~1. 22.6d. $6. 22.6¢. S(p) = 8 for p > 6, 0 otherwise. 22.80, (wi + w2/2)y?. 22.8b. 3y. 22.8b. p/3. 22.8b. 3y/2. 22.8. 16. 22.8¢. 384. 22.8d. (Qu, + wa)y. 22.8d. p/(2w1 + wa). 22.10a. y+ Po. 22.10. y +5 22.10b, y+ 15 22.10d. 25 barrels. 22.10e. It would decrease to 15 barrels. 22.108. S(p) = p—10. 22,108. 20 barrels. 23 Industry Supply 23.0a. S(p) = 6p. 23.0. S(p) = 2p for p < 1,5(p) = 3p—1 for p> 1. 23.00. S(p) = 0 for p < 3, S(p) = 100p — 300 for 3 < p< 4, S(p) = 500p — 1,900 for p > 4. 23.0d. S(p) = 6p — 24 for p > 4. 23.2b. 14,000. 23.2b. $9.20.‘AZO ANSWERS: 23.2b. 2,100. 23.2b. Yes. 23.2b. 110%. 23.2c. 2,100 23.2c. No. 23.2c, $1,909. 23.2c. $1,909. 23.24. Larger. 23.24. $7.20. 23.4e. Y* = 50. 23.4f. If a new firm entered, there would be 51 firms. The supply-demand equation would be 52.5 — p = 51p/2. Solve for p* = 105/53 <2. A new firm would lose money. Therefore in equilibrium there would be 50 firms. 23.4g, Solve 52.5 — p = 50p/2 to get p* = 2.02. 23.4g. y* = 1.01. 23.4g. Around .02. 23.4h. 51, 23.4h. 2. y i, Zero. 23.6a. Profit per bushel = 5 — .10t. 23.6b. Rent = 5,000 — 100. 23.6¢. 50 miles. 23.8, $3.50 23.80. 3.5. 23.8a, 2. 23.8b. $3.20 and 4.8. 23.8b. 3. 23.10, $15,000. 23.12. Supply curve to the right. 23.12b. Increased. 23.12b. Decreased. 23.12b. Decreased. 24 Monopoly 24.2b. 50. 24.2b. 50 cents. 24.24, 75. 24.2d. 37.5 cents per pie. 24.4a, 3. 24.4b, 2.5, Bde. 3.ANSWERS 21 24.6a, At y = 100, p = 100. 24.6c. Larger. 25 Monopoly Behavior 25.20, 20. 25.2b. $60. 25.2c. $20. 25.2d. 40. 25.26. 400. 25.21. 0. 25.4a. 30. 25.da. $90. + 25.4b. 30. 25.4c, $80. 25.4d. 40. 25.4e, 25. 25.6a. $32, which equals the area under the student's demand curve. 25.6a. $50 which is the area under an executive's demand curve. 25.60. $32. 25.6c. $48. 25.6d. Solve 50 — p = 48 — 32 to find p = $34. 25.60, $30. 25.6f. $12. 25.6g, $38. 25.6h. 60. 25.8a. p(x) 25.8b. 25. 25.8c. 50 cents. 25.8d. $12.50 25.8e. Zero. 25.88. 50. 25.8g. 25. 25.8h. $25 25.8h. 0. 25.10a. The only equilibrium is one in which both candidates choose the same position, and that position is at the point 1/2. 26 Factor Markets 1—2/50. 26.2g. CS. = 2507/2. 26.2h. 10 x 2507, 26.21. p* = 500 and D(p*) = 500. 5007.‘A22 ANSWERS 27 Oligopoly 27.2a, 27.2b. 27.2b. 27.2b. 27.2. 27.2c. 27.24. 27.24. 27.24. 27.24. 27.24. 27.24. 27.26. 1,200 — gb,/2. 1,200 — gf,/2 1, 200 + qi/2. 1.25 — g&/3, 200. 1.259% — (g)?/3, 200. 1.25 = qb/1, 600. 1,200. 600. $7/8. $450. $225. Stackleberg No. Carl's profits in Stackleberg equilibrium are larger than in Cournot equilibrium, so Carl will want Simon to know his output. |! 27da, 27da. 27.4b, 27.4b. 27.de. 27.40. 27.4c. 27.4c. 27.40, 27.40. 2de. 27.AE. 274g. 274g. 274g. 274g. 274g. 27.6b. 27.6b. 27.6b. Ie. 276d. 27.60. 27.66. 27.68. 27.66. 27.68. 27.66. 276g. 276g. 276g. 27.8a. 27.88. 27.8b. $4. $-2. ya = 24 — yo/2. te = 24-y/2. 32 16 $36, 24 $52. Profits would inerease by $22. maxy, (100 - 2(y1 + 24- 91/2) — dn. 24 12. 36 $28. 45 70 $450 per day. About $1.6 million. No; losses would be about $900 per day. $60 $2,000, $45. 140. $900. No. $40 80 3400. yep. Op. 1,000 — 100p.ANSWERS A23 27.8c. 500. WB. p= 5. 278d. 50 x 5 = 250. 278d. Ym + Ye = 750. 27.10a. 2(120 — p). 27.10a. 2(120 — p)(p — 20) = 2(140p — p? — 2, 400). 27.10b. $70. 27.10b. 50 27.10b. 100 27.10b. $5,000. 27.10c, $120. 27.10c. 200. 27.10e. $24,000 27.10e. $14,100. 27.10c. $10,100. 27.10c. If Ben pays for delivery, he can price-discriminate between nearby farmers and faraway ones. He charges a higher price, net of transport cost, to nearby farmers and a lower net price to faraway farmers, who are willing to pay less net of transport cost. 28 Game Theory 28.2a. $10. 28.22. $8. 28.2b, $18. 28.2b. $16. 28.2c. Yes. 28.2c. Both keep. 28.4a. Hunt stag. 28.4b. Hunt hare. 28.4c. No. 28.4c. The best action to take depends on what the other player does. 28.4d. Both hunters hunt stag. Both hunters hunt hare. 28.4e. Yes 28.4e. Both bunt stag. 28.4f. Hunt hare. 28.6a. Not Quarrel. 28.6b. No 28.6b. Not Clean. 28.6d. Clean 28.6d. Not Clean 28.6d. If one player does not clean, the other will be angry so there will be a quarrel whether or not the first player cleans. Given that there will be a quarrel anyway, the second player is better off not cleaning than cleaning. 28.6e. No. 28.6e. The best response depends on what the other does. 28.6f. Both clean the room and both don’t clean the room.|A24 ANSWERS, 28.6g. If they both are easy to anger, there are two equilibria, one that is better for both of them and one that is worse for both of them than the equilibrium where neither gets angry and neither cleans. 28.6h. Albert does not clean and Victoria does clean. Nobody starts a quarrel. 28.8b. 20. 28.8b. 80. 28.8b. 0. 28.8b. 120. 28.8b. 0. 28.8b. 120. 28.8b. 0. 28.8c. They’d notice that last night’s attendance is not a good predictor of tonight's. If attendance is low on odd-numbered days and high on even- numbered days, it would be smart to adjust by coming on odd-numbered days. 29 Game Applications 29.2a. No. 29.2a. No. 29.2b. Both go to opera. Both go to mud wrestling. 29.2c, Michele chooses opera with probability 2/3 and wrestling with probability 1/3, Roger chooses opera with probability 1/3 and mud wrestling with probability 2/3. 29.4. Always call heads. 29.4a. Always call heads. 29.4b. It doesn’t matter. You can call heads always, tails always, or randomize your calls. 29.4c. A fair coin. 29.4d. I choose a fair coin, and you randomize with 50% heads and 50% tails. 29.6a. Yes, Wait. 29.6a. No. 29.6b. The only Nash equilibrium is where little pig waits and big pig presses. 29.6c. Little pig. 29.8a. 10 29.8a. 4. 29.8b. If you know that you are meeting a Dove, it pays to be a Hawk. 29.8. 29.8c. 0, 29.8d. If everyone plays Hawk, it would be profitable to play Dove. 29.8e. px O+(1—p) x 4. 29.8f. 4- 4p = 10— lbp. 29.8g. 6/11. .8i. Dove. Hawk. 29.81. Closer. 29.10. 2/3ANSWERS A25 30 Behavioral Economics 30.2a. Exponential. 30.2a, 6 = 1/2 30.2b. 12/7=1.71. 30.2b. 12 x 2/7 30.2b. 12 x 4/7 = 6. 30,2¢. 12 x 2/7 = 3. 30.2c. 12 x 4/7 = 6. 30.2c. Yes. 30.2¢. Yes. 30.4a. Your answer 30.4b. 10 30.4b. 10,000 30.4b. 1/1,000 30.4. 1/1,000 30.4b. No, If he has the surgery he dies with probability 1/200. If he does not have the surgery, he dies with probability 1/1,000. 30.4, 1/100. 30.4e. Yes. 30.6a. 50x if a < 20, 1000 if « > 20. 30.6b. (1~ {z/20)802 = 50e — 52?/2 30.6d. 2 = 30.6e. 50 x Oe 5 x 100/2 = 250 jars. 30.8a, 33.3 = 50 x 2/3 30.8b. 33.3, 30.8b. 22.2 30.8¢. 14.8 30.84. X=0 30.8e. Cal Tech undergraduates 31 Exchange 31.2b. Pareto efficient allocations lie on the line with slope 1 extending from Birger’s corner of the box. 31.2. 7/(p +1) 312d. 1+4p 31.24. 2+ (1/2p) 31.de. We/Qp = Wx/Qx. 31de. -2. B1de. 2. 31.4, 2 quiche, 4 wine. 31.46. 2 quiche, 4 wine. 31.6. -2. 31.10a. ¢; + ¢2/(1+7). 31.10a. I 31.10a. I*/(1-+1). 31.10a. c+ e2/(L+r 31.10a. cy +¢2/(1+7r) 3L.10b. o: = al BL.10b. cy = (1—a)I(1 +r). P/tr).A26 ANSWERS: 31.10b. ey = al*/(1 +7) 3L.10b. ¢2 = (1—a)I*. 31.10b. al”. 31.10b. a = 1/2. 31.10b. .22. 31.10c. NoI*. 31.104. af 31.104. al*/(1+7). 31.10d. Nal + Ngal*/(1 +r). 31100. Mal + Naal*/(.+r) = Nl. 31.10e, 7 = -1L 31.10e. r= 10% 31.108. Supply = demand for period 2 if Ni(1—a)Z(1+r)-+N2(1~a)I* NoI*. If Ny = No and I = I*, then (1—a)(1+r)+(1-a) =1. If a= 11/21, then r= 10%. 32 Production 32.2. F+C/2= 32.20. 4. 32.24, 8. 32.2b. 8.50. 32.2b, $.50 32.2b. 8 32.20. 1 32.20. 1 32.2. 1 32.2c. $.50. 32.4a, Specialize in milk. 32.4b, Specialize in wheat. 32.4c. No. 32.4e. In favor. 32.de. Against. 32.de. The change strictly enlarges the budget set for northerners and strictly shrinks it for southerners. f. Yes. Southerners would now switch to specializing in milk. AE. In favor. 32.4f. Depends on their preferences about consumption. 32.4f. ‘The two alternative budget lines for southerners are not nested. 33 Welfare 33.2a. 200 33.2a. 0. 33.2b. 66.66 33.2b. 66.66. 33.2c. 100 33.2c. 50. 33.4a. A. 33.4a. A. 33.4b. They get the same amount of money. 10)ANSWERS A27 33.4b. A consumes more. 33.4c. B gets more money. 33.4c. They consume the same amount. 334d. A. 334d. A. 33.4e. B. 33.4e, They consume the same amount. 33.6b. Seo diagram. 33.8a, 16, 33.8a. 8. 33.8b. 16. 33.8b. 8. 33.8. The Pareto optimal allocations are all of the allocations in which each person gets at least 8 units of spaghetti. 33.8. 8. 33.8f. 8. 33.8g. Romeo wants to give spaghetti to Juliet, but she doesn’t want to take it. Juliet wants to give spaghetti to Romeo, but he doesn’t want to take it. Both like spaghetti for themselves, but would rather the other had it. 34 Externalities 34.22, 100 34.2a. 150. 34.2b. 150. 34.2b. 150. 34.2c. 150. 34.2c. $1 per unit. 34,4b, Yes. 34.6a. 0. 34.6b. Better off. 34.60. 1/2. 34.6d. No. 34.60. No. 34.6. 100. 34.80. 24. 34.80, 18. 34.80. 576 34.8a. 324. 34.8a. 900. 34.8b. 30 34.8b. 900. 34.8. 30 34.80. 9 34.8¢. 900 34.80. 81. 34.8c. 981. 34.10a. 2,500. 34.10a. 45 x 6,000 = 270,000.‘A28_ ANSWERS 34.10b. N(20 + 35) + (6,000 — V)45. 34.10b. 1,250. 34.10b. 32.5 minutes. 34.10b. 1,250 x 32.5 +4, 750 x 45 = 254, 375 34.10c. $12.5w. 34.10c, $15, 625w. 34.10c. Before the toll was in place, all commuters spent 45 minutes travelling to work. With the toll in place, commuters who travel on the Beltline still spend 45 minutes travelling to work and commuters who travel through Middle Potato are indifferent between spending 45 minutes travelling on the Beltline and paying the toll to go through Middle Potato. Thus nobody would be worse off even if toll revenue were wasted. But everybody gets back about $2.6w per day from the toll revenue, so all are better off. 35 Information Technology 35.2a. .75 35.20, .8529, 8534, 36.2a. 853553. 35.2b. This equation implies x? ~ x +1/8 =0. Solutions are x = 0.85355 and z = 0.14645. Both are equilibrium market shares with a price of $32. 35.4a. Do(P2) — Dy (p1 ~ 0.4p2) + D¥(0.4p2). 35.4a, 35.4b. Dy (py — 0.4p2) + Do(p2) — Da(p, — 0.4p2) + D*(0.4p2) = Da(p2)+ D*(0.4p2). 35.4b. 35.4c. It would remain constant, 354d. pxDi(pr ~ 0.4p2) + p2(Da(p2) — Di(pr ~ 0.4p2) + D¥(0.4p2)) = (1 — pa) Ds (Pi — 0.4p2) + p2(D2(p2) + D*(0.4p2)). 35.4d. 35.4e. Variable cost is c(D2(p2) + D*(0.4p2)). Subtract this from the previous answer. 35.4e. 35.de. 35.46. (p—c)(Da(p) + D*(0.4p)) 35.46. 35.6a. 200(90-p) 35.Ga. 200(p ~ 10)(90 ~ p). 35.6b. $50. 35.6c. 4,000 35.6c. 4,000. 35.6d. $320,000. 36.6e. After two years. 35.6e. After two years is better for students who take the course in the first year of publication and plan to sell. After one year is better for the other students. 38.8a, 50+20/.10 = $250. 35.8b. $50ANSWERS A29 35.8c. Yes, the present value of continuing to use Fasten is $300 while the costs of switching to Czechwriter are $250. 35.8d. No. The present value of continuing to use Fasten are $220 while the present value of switching to Czechwriter is $250. 35.80, Solve the equation 2/.10 = 250 to find x = 25. 35.8f. $5. 38.81. PV = 5/.10 = 50. 35.8f. It is the same. 35.8¢. $150. 35.8h. Solve «/.10 = 250 + 100 for s = 35. 35.8h. $150. 35.8h. It is the same. 358i. Czechwriter. .8). Solve 50+ 25/.10—d = 50+20/.10 to find that the discount should be $50. 35.8k. Fasten. 35.8k. Issue its own coupon for $50 and raise the price of its chécks to $35. 35.10a. 100 35.10b. They can raise the price to $2,000, since libraries have already indicated that they aze willing to pay this much for the pair of journals. 35.10c. They remain the same. 35.10d. Assuming they still bought both journals, libraries would be worse off since they would have to pay the transactions cost for interlibrary loan. 36 Public Goods 36.20, $2. 36.2b. Each pays less than full cost of own meal, so all overindulge. 36.4a. Solve Ws = 2(Wa — pa) to get pp = W/2 36.4b. Solve 2Wp = 3(Wa — pr)» which gives pr = Wr/3. 36.4e. $75. 36.6a. 1/2. 36.6a. Xu/G. 36.6b. 1/2+Xy/G = 1. 36.6c. Yes. 36.6d. One example: Melvin gets $2,500; Lucy gets $500 and G = $5,000. 36.6e. Lucy gets $5,000; Melvin gets $1,000 and G = $2,000. 36.6f. The allocations that satisfy the equations Xx /G = 1/2 and Xz, + Xu + G = $8,000. 36.6g. Less of. 37 Asymmetric Information 37.2a. $12.50. 37.2b, $15 37.2b. $10. 37.2c. $2 37.2c. $1 37.2c. will be 37.2d. $15 37.24. $10.‘A380 ANSWERS, 37.26. $4 37.2e, $1 37.2e. won't be 37.4a. 5. 37.4b. 57/10 37.4e, 5 — 2.50 37.4d. $3.50. 37.4e, $2.50. 37.6a. They'd all sell for $1,000 for total revenue of $1,000,000. 37.6b. $X/2. 37.6c. $X — 200. 37.6c. $X/2. 37.6d. Solve X/2 = X — 200 to get X = $400. 37.6e. The worst 200 cars will be unappraised and will sell for $200. 87.6f. $1,000,000 — 800 x 200 = 840, 000.