Name:___________________________________
Homework #2
Due: Jun. 16, End of Class
Read the directions carefully, and answer all parts of each question. Write neatly; if I can’t read it, it will
be counted wrong. You may work in groups, but you must submit your own solution. Any submissions
that are word-for-word identical will receive a score of 0. Use this sheet as a cover page or lose five
points. No late homework will be accepted under any circumstances.
1. Using no more than a single sentence and in your own words, explain the following with regards
to the market for cowboy boots.
a. Income effect
b. Substitution effect
c. Law of Diminishing Marginal Returns
2. Using the market for cowboy boots, tell if the following will change demand or quantity
demanded also indicating direction (increase or decrease)
a. Price increase of work boots
b. You take a pay cut
c. Price increase of cowboy boots
d. You expect the price of cowboy boots to decrease
e. Price of cigarette lighters increases
3. From the following table, find the market equilibrium.
Qs 1
Qd1
Qs 2
Qd2
Qd3
Qd4
Price
0
10
2
8
2
20
$1
5
8
9
6
1
18
$2
10
6
16
4
0
16
$3
15
4
23
1
0
14
$4
4. Consider the market for cellular phones in Missouri. Assume the market starts in equilibrium
a. Suppose three new services open and start selling phones. Illustrate graphically the
effects of these new services. Explain how the market returns to equilibrium.
b. Suppose that the Surgeon General determines that cell phone use does in fact cause
brain tumors. Illustrate graphically the effects of this report. Explain how the market
returns to equilibrium.
c. What is the net effect on price and quantity of both 4a and 4b?
“It’s not that economists are unreasonable people.
It’s that they are evil people. They work in a different moral universe.”
-Paul Bloom, Yale psychologist