Name: _________________________
Economics PROBLEM SET #2 (2 % of grade; 10 points possible)
Date DUE:
Problem sets lose 5 points if they are 0 minutes - 24 hours late after the start of section. No problem sets accepted more than 24
hours after section/lecture begins. Your submitted work must be your own: Problem sets that are identical (in whole or in part) to
another student’s problem set will receive a zero.
IMPORTANT: Place your answers in the area indicated. Problem set answers must be on this sheet to be graded.
1.
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(3 points total) For each of the events described below, sketch a supply and demand graph that illustrates the event. Be
sure to properly label all curves and relevant points in your graph. In the area to the left of your graph, explain why you
think your graph is correct. In that area, also answer the questions asked.
a.
Gasoline: Strong growth in India, China, and the Middle East has
increased worldwide demand for energy sources like oil. What is
the effect on the price of gasoline in the US?
On the quantity of gasoline sold?
b.
Fresh fruit: Walmart, the nation’s largest grocery retailer by far, uses
its vast network of purchasers and shipping centers to reduce the costs
of buying and transporting fresh fruit. Because it’s now cheaper, families
add more fresh fruit to their daily diets. What is the effect on the retail
price of fresh fruit? On the quantity of fresh fruit sold?
c.
Houses in Richmond: Tighter lending standards make it more
difficult for many families to borrow money to buy a house. At the
same time, thousands of houses taken by banks through foreclosure
are offered for sale. What happens to the price of houses in
Richmond? To the quantity sold of houses in Richmond?
2.
(1 point total) For each statement, is it a positive or a normative statement? Briefly, explain why.
a. Recent earthquakes in Haiti and Japan destroyed part of Japan’s and much of Haiti’s infrastructure, which
lowered economic growth in Japan and Haiti.
b.
3.
The United States should provide aid to Haiti to help it rebuild its infrastructure, but not to Japan because Haiti
is poorer than Japan.
(1½ points total) A country can produce two types of output: food and agricultural implements & machinery.
a.
Draw a production possibilities frontier at the right, with food (F) on the vertical axis and agricultural
implements & machinery (M) on the horizontal axis. Label your curve PPF.
Mark a point (A) on the graph that corresponds to an
economy using its resources efficiently and producing
mostly food and very little agricultural implements &
machinery. Mark a different point (B) on the graph that
corresponds to an economy using its resources inefficiently
and producing mostly agricultural implements &
machinery and very little food.
(There’s nothing to write here)
b.
The economy is initially at a point like (A) on your graph above.
The government of this country implements an effective policy that encourages farmers to purchase more
agricultural implements and machinery.
i. What effect will this policy have on the economy in the short run? Illustrate the effects of the policy
on your graph.
ii.
c.
_____
Will the long run changes to the economy be different from the short run change? Explain
There are other countries in the world that produce food and machines. Should the government of this country
encourage farmers to purchase more domestically made agricultural implements and machinery, or should the
government seek outside (international) aid that could provide farmers with that machinery? Does your answer
depend on whether the country is relatively rich or relatively poor? Explain your answers.
4.
(2½ points total) Taylor and Morgan are a couple who are about to adopt a baby. They are trying to decide who should be
the stay-at-home parent. They are both able to work (producing consumption units, “CU”) and they are both able to care
for the baby and the home (producing homemaking units, “HU”).
 In one week, Taylor can produce 5,000 consumption units or 2,000 homemaking units or a mix of the two.
 In one week, Morgan can produce 3,000 consumption units or 3,000 homemaking units or a mix of the two.
For both Taylor and Morgan, their individual trade-offs between CU and HU are constant, regardless of how they allocate their
time.
Currently Taylor is producing 2,500 consumption units and 1,000 homemaking units per week, while Morgan is producing 1,500
consumption units and 1,500 homemaking units per week.
a.
Fill in the table at the right, showing
the opportunity costs for Taylor and
for Morgan.
Show your work here or in the table.
b.
Who has the absolute advantage in the production of HU? Morgan or Taylor (circle one)
Who has the absolute advantage in the production of CU? Morgan or Taylor (circle one)
c.
Who has the comparative advantage in the production of HU? Morgan or Taylor (circle one)
Who has the comparative advantage in the production of CU? Morgan or Taylor (circle one)
d.
Morgan and Taylor decide who will work and who will be the stay-at-home parent. What do they decide? In one week,
how many homemaking units and how many consumption units will they produce in total? What are the gains from trade
(that is, compared with the initial total production, how many additional HU and additional CU will Morgan and Taylor
collectively produce when they completely specialize and then trade)?
_________________ will produce homemaking units and _________________ will produce consumption units.
In total, they will produce __________________ homemaking units and __________________ consumption units.
The gains from trade are ______________ homemaking units and _____________ consumption units.
(show work)
e.
_____
Unexpectedly, Morgan is offered a new job. Morgan can now produce 7,500 consumption units or 3,000 homemaking
units or a mix of the two. Should Morgan and Taylor continue to specialize and trade, or should each of them produce a
mix of consumption units and homemaking units? Explain.
5.
(2½ points total) A University of California Professor has estimated that the demand curve for tuition & fees for a semester at
Cal-Berkeley is as follows:





29% of the market is willing to pay $20,000 or more
53% of the market is willing to pay $15,000
75% of the market is willing to pay $10,000
91% of the market is willing to pay $5,000
100% of the market is willing to pay $1,000
a.
Carefully draw the demand curve at the right.
Assume a smooth curve connects the 5 points.
Continue the demand curve up and to the left until
you hit the vertical axis.
b.
40,000 California residents applied for admission for
Fall 2011. 10,000 will be admitted to Berkeley. If
admission was based on willingness to pay, what
would be the price of one semester’s tuition and fees
at Cal? Show the result on your graph.
Price would be $____________
c.
The price of a semester of tuition and fees for
California residents cannot go above $6,500. Is this a
price ceiling or a price floor? Is there a market
surplus or market shortage at a price of $6,500? Show
this on your graph.
(circle one)
Price ceiling
Price floor
Market surplus
Market shortage
(circle one)
_____
d.
Is admission to Cal determined by a price rationing mechanism or a non-price rationing mechanism? Explain, with
reference to the type of rationing mechanism that is actually used.
e.
The State of California currently needs to reduce spending or increase taxes (or some combination) by $28 billion by
the end of the year. Should admission to Cal be based on ability to pay? Why or why not?
f.
MSU has 25,000 applicants, admits 19,000 and enrolls 7500. One semester at MSU costs $5575, about 5 times -- in
real terms -- what it cost when Mr. Mann paid his last tuition bill in 1985. Total University enrollment is greater than
in 1985, but freshman and sophomore enrollment is 10% less than in 1985. Has the rapid increase in tuition had a
significant influence on undergraduate enrollment? Explain your reasoning.
6.
(3 points total) About 16 billion gallons of soda are sold in the U.S. each year – about 50 gallons of soda per year for each
man, woman, and child in the U.S. At about 1,500 calories per gallon, is it any wonder we have an obesity epidemic? One
proposal for fighting obesity by lowering soda consumption is to implement a federal soda tax of 1¢ per ounce. So a
typical 16 oz. bottle of Coke would have a 16¢ tax added to it.
a.
Suppose Graph A at the right depicts the market
for 16 oz. bottles of soda before the tax increase.
On the graph, show the effect of the additional
1¢/ounce tax. What is the new equilibrium price
paid per 16 oz. bottle and new equilibrium
quantity of 16 oz. bottles of soda consumed?
b.
Suppose instead that Graph B at the lower right
depicts the market for 16 oz. bottles of soda
before the tax increase. On the graph, show the
effect of the additional 1¢/ounce tax. In this case,
what is the new equilibrium price paid per 16 oz.
bottle and new equilibrium quantity of 16 oz.
bottles of soda consumed?
c.
In which case – A or B (circle one) –
will the imposition of the tax increase
government revenue the most?
In which case –A or B (circle one) –
will the imposition of the tax cause soda consumption to fall the most?
d.
In states with high soda consumption (over 80 gallons per person annually) there are also very high rates of
diabetes, a chronic disease associated with obesity. The high soda consumption is due in part to an unwillingness
to view other liquids as substitutes for soda. Which graph – A or B (circle one) – do you think is a better
representation of the market for soda in states with high soda consumption? Why? Use the concept of elasticity
in your answer.
_____
e.
In which case – A or B (circle one) – is the percentage change in consumer surplus following imposition of the tax
greater? Explain, using the concept of elasticity in your answer.
f.
Should the government implement a soda tax? Explain.