Economics H201
Professor S. McCafferty
Sample Problems I
1) The meal plan at University A lets students eat as much as they like for a fixed fee of
$500 per quarter. The average student there eats 200 pounds of food per quarter.
University B charges $500 for a book of meal tickets that entitles the student to eat 200
pounds of food per quarter. If the student eats more than 200 pounds of food, he or she
pays $2 for each additional pound of food; if the student eats less, he or she gets a $2 per
pound refund.
a) If students are rational, at which university will food consumption be higher?
Explain briefly.
Food consumption will be higher at University A.
b) Which of Mankiw’s Ten Principles of Economics does this example illustrate?
Explain briefly.
Rational People Think at the Margin.
People Respond to Incentives.
2
2) Consider an economy consisting of only Helen, who allocates her time between
sewing dresses and baking bread. Each hour she devotes to sewing yields 4 dresses, and
each hour she devotes to baking yields 8 loaves of bread. Suppose Helen works 8 hours
in a given day.
a) In the graph below, draw Helen’s production possibilities frontier. (5 points)
Dresses
48
40
32
24
16
Loaves of
Bread
8
12
24
36
48
60
72
84
96
b) For Helen, what is the opportunity cost of one dress, expressed in units of loaves
of bread? Show your calculation.
One dress requires 15 minutes of work. One loaf of bread requires 7 1 2 minutes of
work. To produce one dress, Helen would have to produce 2 fewer loaves of bread.
Therefore, the opportunity cost is two loaves of bread.
c) Consider the possibility of Helen producing 16 dresses and 36 loaves of bread.
Would this production plan be efficient, inefficient, or not feasible? Explain
briefly.
She would require 164  4 hours to produce the dresses and 368  4 12 hours to produce
the bread. She cannot do this in the 8 allotted hours. Therefore, not feasible.
d) Consider the possibility of Helen producing 6 dresses and 48 loaves of bread.
Would this production plan be efficient, inefficient, or not feasible? Explain
briefly.
3
She would require 64  1 12 hours to produce the dresses and 488  6 hours to produce
the bread. Helen would not be using all of her allotted work hours. Therefore,
inefficient.
3) Assume that the retail market for gasoline is well captured by the model of perfect
competition, as in the diagram below.
Price
Supply
P0
Demand
Quantity
Q0
a.) In the summer months, the price of gasoline often increases. In the diagram
below, draw the most likely shifts in the supply and/or demand curves that best
explain this typical summer phenomenon. Explain briefly.
More summer driving indicates a rightward shift in the demand curve.
Price
Supply
P1
P0
Demand
Q0
Q1
Quantity
4
b.) Due to Hurricane Katrina, there were a number of unforeseen repair problems at
Gulf coast oil platforms, pipelines and gasoline refineries. In the graph below,
draw the most likely shifts in the supply and/or demand curves that best explain
the likely effects of such breakdowns. Explain briefly.
The loss of productive capacity is a leftward shift in the supply curve.
Price
Supply
P1
P0
Demand
Q1
Q0
Quantity
c.) In addition to unforeseen breakdowns, refineries must also be shut down for
periodic maintenance. During maintenance, a refinery is out of service and the
owner of the refinery cannot make any profits. Why is it in the refinery owners
interests to do periodic maintenance? What principle of economics best describes
such a refinery owner’s decision to close a refinery? When is such maintenance
most likely to be done? Explain briefly.
A refinery may be closed because People Face Tradeoffs.
The best time to close the refinery is when the opportunity cost is lowest.
As one possibility, close the refinery when the price of gasoline is relatively
low.
5
4) Milk and orange juice would be considered substitutes for one another. Now suppose
that a hard freeze in Florida damages some of the orange crop. In the diagrams below,
work out the implications of the bad weather on the equilibrium prices and quantities of
orange juice and milk. Explain briefly, but carefully why you shifted any of the supply
and demand curves.
Orange Juice
Milk
PO. J .
PMilk
D
S
D
PO0. J .
S
0
PMilk
QO0 . J .
QO. J .
0
Q Milk
Q Milk
The supply of orange juice shifts to the left, due to the reduction in the amount of
oranges produced. The demand for milk shifts to the right due to the increase in the
price of orange juice, a substitute.
5) The local pizza market consists of two buyers, Nancy and George, and two sellers,
Papa John’s and Donato’s. Nancy’s demand schedule, in terms of pizzas per month is
given by:
Nancy’s Demand
Price Quantity Demanded
$2
18
$3
17
$4
16
$5
15
$6
14
6
George’s demand schedule, in terms of pizzas per month, is given by:
George’s Demand
Price Quantity Demanded
$2
8
$3
7
$4
6
$5
5
$6
4
a.) Fill in the correct values in the market demand schedule below.
Market Demand
Price Quantity Demanded
$2
26
$3
24
$4
22
$5
20
$6
18
Papa John’s supply schedule, in terms of pizzas per month, is given by:
Papa John’s Supply
Price Quantity Demanded
$2
6
$3
7
$4
8
$5
9
$6
10
Donato’s supply schedule, in terms of pizzas per month, is given by:
Donato’s Supply
Price Quantity Demanded
$2
10
$3
12
$4
14
$5
16
$6
18
7
b.) Fill in the correct values in the market supply schedule below.
Market Supply
Price Quantity Supplied
$2
16
$3
19
$4
22
$5
25
$6
28
c.) Calculate the equilibrium quantity and price in the market for pizzas.
The equilibrium quantity is 22 and the equilibrium price is $4.
Now suppose that another supplier, Domino’s, enters the market for pizzas. Domino’s
supply schedule is given by:
Domino’s Supply
Price Quantity Supplied
$2
4
$3
5
$4
6
$5
7
$6
8
d.) Fill in the correct values in the revised market supply schedule below.
Market Supply
Price Quantity Supplied
$2
20
$3
24
$4
28
$5
32
$6
36
e.) Calculate the new equilibrium quantity and price in the market for pizzas. Do
price and quantity move in the same direction? Do price and quantity move in the
opposite direction?
The new equilibrium quantity is 24 and the new equilibrium price is $3.
8
f.) If price and quantity move in the same direction, does this result contradict the
law of demand? If price and quantity move in the opposite direction, does this
result contradict the law of supply? Explain the apparent paradox.
Price and quantity move in opposite directions. This is consistent with the law of
supply, because we have a change in supply, rather than simply a change in the
quantity supplied.
6) For each of the following transactions, state the effect on U.S. GDP. Also identify
the separate effects each transaction may have on U.S. consumption, investment,
government spending, and net exports.
a) Your aunt buys a new car from a U.S. producer.
GDP increases because of an increase in consumption.
b) Your aunt buys a new car imported from Sweden.
GDP is unchanged. Consumption increases and net exports decrease (because
imports increase).
c) Your aunt’s car rental business buys a new car from a U.S. producer.
GDP increases because investment increases.
d) The U.S. Government buys your aunt a new, domestically produced car when she
is appointed as the Director of the CIA.
GDP increases because government spending increases.
7) Consider the following statistics for a hypothetical country. This country's only
products are Food, Clothing, and Entertainment. In the base year, price and quantity data
are given by:
Good
Food
Clothing
Entertainment
Quantity
6
3
1
Price
$1
$2
$6
In the current year, price and quantity data are given by:
Good
Food
Clothing
Entertainment
Quantity
8
4
3
Price
$2
$5
$10
9
a.) Calculate Nominal Gross Domestic Product in the Base Year.
Nominal GDP  6  $1  3  $2  1  $6  $18
b.) Calculate Nominal Gross Domestic Product in the current year.
Nominal GDP  8  $2  4  $5  3  $10  $66
c.) Calculate the percentage change in Nominal Gross Domestic Product from the
Base year to the current year.
Percentage Change 
$66  $18
 267%
$18
d.) Calculate the value of the GDP Deflator for the current year.
Current Year Real GDP  8  $1  4  $2  3  $6  $34
GDP Deflator 
Nominal GDP
$66
 100 
 100  194.1
Real GDP
$34
e.) Suppose that the base year quantity data given above exactly reflects weights
given to the three goods in the survey of consumers compiled by the Bureau of
Labor Statistics. Calculate the value of the Consumer Price Index for the current
year.
Base Year Q' s @ Current P' s
 100
Base Year Q' s @ Base Year P' s
6  $2  3  $5  1  $10

 100  205.6
$18
CPI 
10
8) For this problem, use the figures in the table below.
CPI
Year CPI relative to
year 2005
1960 29.6
0.15
1970 38.8
0.20
1980 82.4
0.42
1985 107.6
0.55
1990 130.7
0.67
1995 152.4
0.78
2000 172.2
0.88
2005 195.3
1.00
a.) Suppose that your mother earned $20,000 in her first job in 1980. How much
would you have had to earn in 2005 to match the standard of living that your
mother’s first job would have provided. Show your work.
Today' s Value of Previous Amount
Current Price
 Previous Amount 
Previous Price
195.3
 $20,000 
 $47,402.91
82.4
b.) Suppose that a gallon of gasoline cost $2.75 in 2005. Suppose that a gallon of
gasoline cost $0.40 in 1960. In what year was gasoline more expensive relative to
the overall cost of living? Use the appropriate calculation to justify your answer.
Historical Value of Today' s Amount
Previous Price
 Today' s Amount 
Current Price
29.6
 $2.75 
 $0.42
195.3
Gasoline is more expensive in 2005.
Note: You could also revalue $.40 to it’s 2005 value ($2.64).