Economics 100B
Spring 2016
Gallet
Homework #1
Note: Questions 4 and 5 are printed on the other side of this sheet.
[1]
Consider the following annual data on approximate cigarette sales and cigarette producer
advertising expenditures over the 1986-1990 period:
YEAR
1986
1987
1988
1989
1990
CIG
580
577
555
530
500
ADV
2400
2700
3000
3300
3600
Note: CIG = Annual cigarette sales (in billions of packs) and ADV = advertising expenditures of
cigarette producers (in millions of dollars). Sketch the shape of the curve depicting the relationship
between cigarette sales and cigarette advertising, placing CIG on the vertical axis and ADV on the
horizontal axis. Discuss the relationship between CIG and ADV by (i) discussing the direction of the
relationship between the two variables and (ii) discussing whether or not the slope of the curve is constant
when moving along the curve.
[2]
The table below provides data on the price of a balloon ride (in dollars per ride), the temperature
(in degrees Fahrenheit), and the number of rides a day.
Price
5
10
15
20
Balloon rides (number per day)
50 degrees
70 degrees
90 degrees
30
50
70
25
45
65
20
40
60
15
35
55
A.
Holding price constant at 5, graph the relationship between the number of balloon rides (on the
vertical axis) and temperature (on the horizontal axis). What is the slope of the graph?
B.
Now, on the graph you created in part A, illustrate what happens to the curve relating balloon
rides and temperature as the price of a ride increases (i) from 5 to 10, (ii) from 10 to 15, and (iii) from 15
to 20.
C.
Consider the following equation: Balloon rides = A + B•Temperature + C•Price. Based on your
answers to parts A and B, what can we say about B and C (i.e., Are they positive, negative, or zero)?
[3]
Using demand and supply curves, illustrate and explain how the following would affect the
equilibrium price and quantity of wood tables.
A.
The Environmental Protection Agency bans the cutting down of “old growth” forests, causing
lumber prices to rise.
B.
The price of glass tables, which are a substitute in the consumption and production of wood
tables, rises.
C.
The price of sofas, which are a complement in consumption, declines.
[4]
At an urban college where most students commute to classes, there are 8,000 parking spaces for
students. All students pay $150 a semester for a pass that allows them to park in any one of those 8,000
spaces. Between 8 AM and 1 PM there are always students waiting in parking lots for spaces to open up.
Students attending classes during this time are always complaining about how difficult it is to find a place
to park. Between 5 PM and 9 PM there are always a large number of empty spaces in the parking lots.
Students who attend classes at night never have a problem parking. Illustrate the parking situation for
these two different times of day using supply and demand curves. Draw separate graphs for the day and
night students. Hint: Supply is fixed. Are these "markets" in equilibrium? Explain.
[5]
The market demand and supply of cement is given by:
Qd = 5000 - 10P + 5Y
Qs = 1500 + 2.5P - 25W,
where Qd = quantity demanded, Qs = quantity supplied, P = price of cement, Y = average household
income, and W = average wage of employees in the cement industry.
A.
Given an income level (Y) of $1000 and a wage (W) of $10, graph the demand and supply curve.
Does a surplus or shortage exist when the price of cement is $500? Explain. How much is the shortage
or surplus?
B.
Given an income level (Y) of $1000 and a wage (W) of $10, what is the equilibrium quantity and
price in the cement market? Show work.
C.
What happens to the equilibrium quantity and price if income increases to $1500. Illustrate your
answer with a graph.