Homework 1
Economics 503
Foundations of Economic Analysis
Assigned: Session 2;
Due: Session 4
1. Suppose there are only the following three goods in the economy:
Year
Good
Price
Quantity
2005
Broccoli
Carrots
Milk
$2.50
$1.25
$100
1,000
500
10
2006
Broccoli
Carrots
Milk
$3.50
$2.25
$100
800
400
14
a. Calculate the nominal GDP for 2005 and 2006.
b. Calculate the % change in real GDP from 2005 to 2006. First, use 2005 as the
base year. Then use 2006 as the base year. Which is larger?
c. What is the GDP deflator for 2006 if it 1 in 2005.
2. Consider a world where the market basket of the international consumer is 10
Starbucks Grand Latter’s and 10 McDonald’s Big Mac’s. The following chart
shows the price of each of these products (in local currency) in 2009. Calculate
the price of the market basket for each country. Calculate a PPP conversion index.
Which country has the cheapest goods, which has the most expensive?
2009 Grand Latte
Big Mac
S
USA
3.75
3.71
Britain
2.35
2.27
0.625
Canada
3.75
4.51
1.08
Japan
420
355.81
91
China
28
14.89
6.83
3. The price of a property transaction of an apartment on HK Island with an area
between 100m2 and 160m2 in June of 1997 was at HK$143,462 per m2. The
composite CPI for June 1997 was CPI6/97 =112.7. The average price of a similar
class apartment in November 2010 was at HK$222,846. Get the composite CPI
from Hong Kong Department of Census and Statistics for November 2010.
Calculate the 1997 value of an apartment measured in November 2010 dollars.
4. Consider the following for a demand curve
Price
11
10
9
8
7
6
5
4
3
Quantity
10
20
30
40
50
60
70
80
90
a. Use the midpoint formula to calculate the price elasticity between a price of
$10 and $11.
b. Use the midpoint formula to calculate the price elasticity between a price of
$3 and $4.
c. At what point is the total revenue maximized? What is the elasticity of
demand if you raise the price $1 from that point?
5. Using the demand and supply diagrams (one for each market), show what
short-run changes in price and quantity would be expected in the following
markets if chemists develop a new cheaper method for making jet plane fuel. Each
graph should contain the original and new demand and supply curve, and the
original and new equilibrium prices and quantities. Fore each market, write one
sentence explaining why each curve shifts or does not shift.
a. The market for air travel.
b. The market for rail travel.
c. The market for suitcases.
6. Suppose the demand and supply curves for a product are given by
QD  500  2 P
QS  100  3P
a. Find the equilibrium price and quantity.
b. If the current price of the product is $100, what is the quantity supplied and
the quantity demanded? How would you describe this situation and what
would you expect to happen in this market?
c. Suppose that demand changes to QD=600-2P. Find the new equilibrium price
and quantity and show this on your graph.