Quiz 2

1. [6 points] Consider the two unrelated situations:

a. The price for cars in the market increases
b. There is a new technology that has upgraded the efficiency in the production of
cars.
Graphically show how these changes would affect the market for cars differently.

2. [5 points] Suppose tea and coffee are substitutes in a market. How will a drop in the
price of tea affect the demand curve for coffee? Explain using graph(s).

3. Suppose that your demand schedule for compact discs is as follows:

Price Quantity Demanded Quantity Demanded

(in $) (Income = $10,000) (Income = $12,000)

8 40 50

10 32 45

12 24 30

14 16 20

16 8 12

a. [4 points] Use the midpoint method to calculate your price elasticity of demand as
the price of compact discs increases from $8 to $10 if (i) your income is $10,000,
and (ii) your income is $12,000.
b. [3 points] Calculate your income elasticity of demand as your income increases
from $10,000 to $12,000 if (i) the price is $12, and (ii) the price is $16.

4. Your total benefits from consuming different quantities of gas each week are shown in
the following table.

Gallons Total Benefit Marginal

(per Week) (in $) Benefit
(in $)

0 0

1 8

2 15
 3 21

4 26

5 30

6 33

7 35

8 36

a. [3 points] Complete the marginal benefit column starting with the step from 0
gallons to 1 gallon per week.
b. [5 points] The price of gasoline is $4 per gallon. Use the Principle of Optimization
at the Margin to find an optimal number of gallons of gas to consume each week.
(Use the additional blank columns in the table if needed)
c. [4 points] Some people have suggested a tax of $2 per gallon of gasoline as a
way to reduce global warming. (Burning fossil fuels such as gasoline releases
greenhouse gases, which are a cause of global warming.) Suppose the price of
gasoline (including the tax) rises to $6 per gallon. Use the Principle of
Optimization at the Margin to find an optimal number of gallons of gasoline given
this new tax on gasoline

5. A student has a monthly budget of $100 to spend on either burritos, which cost $10
each, or tacos, which cost $5 each.
a. [2 points] What is the largest number of burritos that the student could afford to
purchase in one month? What is the largest number of tacos the student could
afford to purchase in one month?
b. [3 points] Draw the student's budget constraint identifying the intercepts and the
slope.
c. [2 points] In your graph, shade the region which shows the possible combinations
that are affordable.
d. [3 points] What is the equation for the student's budget constraint?

6. The demand and supply curves for tea in the Ashoka campus are given by the following
two equations
QD = 8000 – 800P; QS = 2000 + 200P
where QD represents the quantity demanded, QS represents the quantity supplied and
P represents the price of tea.
a. [5 points] Find the equilibrium quantity and price.
b. [5 points] In winter, more students like drinking tea. In this case, which of the
following equations would be the new demand curve? Explain.
i. QD = 6500 – 800P or
ii. QD = 9500 – 800P
7. [7 points] A price ceiling set above the equilibrium price for a commodity will result in an
increase in the equilibrium price. Argue true or false using a diagram.

8. [6 points] Consider the two unrelated situations:

a. The price for low-rise jeans in the market increases
b. Due to the latest trend, there is a sudden hype for low-rise jeans in the market.
Graphically show how these changes would affect the market for jeans differently.

9. [5 points] Suppose paper and pen are complementary goods in a market. How will a
drop in the price of paper affect the demand curve for pens? Explain using graph(s).

10. Suppose that business travelers and vacationers have the following demand for airline
tickets from New York to Boston:
Price Quantity Demanded Quantity Demanded
(in $) (Business Travellers) (Vacationers)

150 2100 1000

200 2000 800

250 1900 600

300 1800 400

a. [4 points] As the price of tickets rises from $200 to $250, what is the price
elasticity of demand for (i) business travelers and (ii) vacationers? (Use the
midpoint method in your calculations.)
b. [3 points] Why might vacationers have a different elasticity than business
travelers?

11. Suppose the total benefit and total cost to society of various levels of pollution reduction
are as follows:

Pollution Total Benefit Total Cost Total Net Marginal Marginal

Reduction Benefit Benefit Cost

0 0 0

1 20 9

2 38 20

3 54 33

4 68 48
5 80 65

6 90 84

a. [3 points] Complete column 4.

b. [5 points] Use optimization in levels to show that if the U.S. Environmental
Protection Agency (EPA) wants to maximize total net benefit, then it should
require 3 units of pollution reduction.
c. [4 points] Complete columns 5 and 6, starting with the step from 0 to 1 unit of
pollution reduction.

12. A student has a monthly budget of $200 to spend on either pizza, which costs $20 each,
or burgers, which cost $10 each
a. [2 points] What is the largest number of pizzas that the student could afford to
purchase in one month? What is the largest number of burgers the student could
afford to purchase in one month?
b. [3 points] Draw the student's budget constraint identifying the intercepts and the
slope.
c. [2 points] In your graph, shade the region which shows the possible combinations
that are affordable.
d. [3 points] What is the equation for the student's budget constraint?

13. The demand and supply curves for pizza in the Ashoka campus are given by the
following two equations:
QD = 3300 – 2P; QS = 500 + 8P
where QD represents the quantity demanded, QS represents the quantity supplied and
P represents the price of pizza.
a. [5 points] Find the equilibrium quantity and price
b. [5 points] A new food outlet opens on campus, serving south Indian food. A lot of
students decreased their pizza consumption to eat dosas. In this case, which of
the following equations would be the new demand curve for pizza? Explain.
i. QD=4200-2P or
ii. QD=2000-2P

14. The government has decided that the free-market price of tea is too low.
a. [4 points] Suppose the government imposes a binding price floor in the tea
market. Use a supply-and-demand diagram to show the effect of this policy on
the price of and the quantity of tea sold. Is there a shortage or surplus of tea?
b. [3 points] Farmers complain that the price floor has reduced their total revenue. Is
this possible? Explain