Draw graphs by hand
Econ 2020: Microeconomics
Problem Set #1
Please submit your answers through the D2L assignment dropbox. Draw all graphs by hand.
1. It takes 1 hour to travel from New York to Washington D.C. by air and 4 hours by train. The airfare is
$200 and the train fare is $85. If a traveler wishes to minimize the total cost of making this trip, which
mode of transportation should be selected if the traveler’s opportunity cost of time spent in transit is
$15 per hour? At what wage would it make sense to switch modes of transportation? Justify your
answers.
2. Draw a production possibilities frontier (PPF) with missiles on the horizontal axis and butter on the
vertical axis, illustrating these options, showing points A – F.
Option
missiles
butter
A
0
30
B
1
28
C
2
24
D
3
18
E
4
10
F
5
0
a. Can this country produce 24 units of butter and 4 missiles? Explain. Where would this point lie
relative to the PPF?
b. What is the trade-off when moving from point A to B?
c. What is the opportunity cost of increasing missile production from 3 – 4 units?
d. What is the opportunity cost of increasing butter production from 18 – 24 units?
e. What is the maximum amount of butter that can be produced, if all resources are devoted to
butter production?
f. Can this country produce 2 missiles and 10 units of butter? Yes or no? Where would this point
lie relative to the PPF?
3. Suppose the information given in question 2 represents the PPF1. Draw a new PPF diagram and
illustrate what happens when the missile sector experiences an increase in new resources and
technology. Show both PPF1 and PPF2 on your graph.
4. You and your friend Olivia are both volunteers at a cat rescue. The shelter supervisor asks the two of
you to clean out kennels and haul bags of cat food from the donation area to the storage area. You know
from your last time volunteering that you can clean out 10 kennels in an hour or move 5 bags of cat food.
Olivia can clean out 6 kennels in an hour or move 6 bags of cat food. Olivia suggests that you split the
tasks equally. Answer the following questions to determine if Olivia is making the best decision.
a. Who has absolute advantage in doing each task?
b. What are Olivia’s opportunity costs of cleaning out kennels?
c. What are your opportunity costs of cleaning out kennels?
d. Who has a comparative advantage in doing each task?
e. Who should do each task to minimize the amount of time you both spend?
f.
Was Olivia’s suggestion the best possible way to allocate your time? Why or why not?
5. For each of the following changes in the demand or supply curves in the automobile market below,
draw a graph showing the old demand and supply curves as well as the new demand or supply curve
(whichever shifts). Also show how the equilibrium price and equilibrium quantity change.
Please show your work on 6 different graphs. Also, please be neat. Thank you!
a. The income of consumers rises and automobiles are considered a normal good.
b. Over time, and due to new resource discoveries, gasoline prices fall.
c. The availability and price of public transportation falls.
d. With lower trade barriers, foreign automakers export more cars to the U.S.
e. U.S. automobile workers unionize, causing wages to rise.
f.
Due to research and development (R&D), new technologies enable automakers to produce cars
much faster.
6. a. Given the following table, plot the demand and supply curves for cheese.
Price
Quantity Demanded
Quantity Supplied
$7
5
3
5
10
15
15
10
5
b. Would $3 be considered an effective (i.e., binding) price ceiling?
c. With an effective price ceiling, what will happen to the market for cheese? Be specific.
d. If the price ceiling was removed from the model, what will happen to price, quantity demanded,
and quantity supplied? Be specific.
e. What effect would a $7 price ceiling have on this market? What price and quantity will show up
in the market?
7. Refer to the diagrams posted with the problem set instructions. If the price ceiling is binding,
determine:
a. the area of consumer surplus.
b. the area of producer surplus.
c. the area of deadweight loss.
8. Refer to the diagram below. Determine the area of consumer surplus in $$$.
9. Suppose a ticket to a Rolling Stones concert is $400 and at that price, the quantity of tickets
demanded is 47,000 per concert.
a. Using the midpoint method of calculating percentage changes, if the ticket price increases to
$500 and the quantity demanded decreases to 46,000, what is the price elasticity of demand for
Rolling Stones concert tickets?
b. Referring to the above, which is greater — the % change in quantity demanded or the % change
in price?
c. Is the demand for Rolling Stones concert tickets elastic or inelastic? How do you know?
+d. What will happen to total revenue (TR) when the price increases to $500? Briefly explain.
10. Neal is a coffee drinker. At a local coffee shop, the price of a cup of coffee is $3. Neal’s total benefits
from drinking coffee is provided in the table below. What is Neal’s marginal benefit of consuming each
cup of coffee? How many cups should he consume each day?
Quantity of coffee
Total benefits
1
2
3
4
5
$8
14
18
20
21
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