ID:＿＿＿＿＿＿＿
Name:＿＿＿＿＿＿＿＿
Due day: 2013.12.11
Homework #3(A)
Economics (I) ECON100103
Part I. Multiple Choices: 50% (5% each)
Please check out the questions via your e-mail and fill your answers in below blanks.
1
2
3
4
5
6
7
8
9
10
B
A
B
B
D
A
D
A
C
D
Part II. Problems: 50%
Price per
Quantity
Quantity
Bushel
Demanded
Supplied
(dollars)
(bushels)
(bushels)
$2
40,000
4
34,000
4,000
6
28,000
8,000
8
24,000
16,000
10
20,000
20,000
12
18,000
28,000
14
12,000
36,000
16
6,000
40,000
0
Table 1
Table 1 above contains information about the corn market. Answer the following questions based on this table
1. Refer to Table 1. An agricultural price floor is a price that the government guarantees farmers will
receive for a particular crop. Suppose the federal government sets a price floor for corn at $12 per
bushel.
a. What is the amount of shortage or surplus in the corn market as result of the price floor?
b. If the government agrees to purchase any surplus output at $12, how much will it cost the
government?
c. If the government buys all of the farmers' output at the floor price, how many bushels of corn will it
have to purchase and how much will it cost the government?
d. Suppose the government buys up all of the farmers' output at the floor price and then sells the
output to consumers at whatever price it can get. Under this scheme, what is the price at which
the government will be able to sell off all of the output it had purchased from farmers? What is the
revenue received from the government's sale?
e. In this problem we have considered two government schemes: (1) a price floor is established and
the government purchases any excess output and (2) the government buys all the farmers' output
at the floor price and resells at whatever price it can get. Which scheme will taxpayers prefer?
f. Consider again the two schemes. Which scheme will the farmers prefer?
g. Consider again the two schemes. Which scheme will corn buyers prefer?
ANSWER:
a 10,000 surplus
b $12 × 10,000 = $120,000
c 28,000 bushels × $12 = $336,000
d $6 per bushel and government receives $6 × 28,000 = $168,000
e Taxpayers prefer scheme (1)
f In terms of revenue, farmers are indifferent between the two schemes
g Corn buyers prefer scheme (2)
2. The Wong family consumes 3 pounds of fish and 5 pounds of chicken per month. The price of fish is $8
per pound and chicken is $4 per pound.
a. What is the amount of income allocated to fish and chicken consumption?
b. What is the price ratio (the price of fish relative to the price of chicken)?
c. Explain the meaning of the price ratio you computed.
d. If the Wongs maximize utility, what is the ratio of the marginal utility of fish to the marginal utility
of chicken?
e. If the price of chicken rises, will the Wong family consume more chicken, less chicken or the same
amount of chicken? Explain your answer using the rule of equal marginal utility per dollar.
ANSWER:
A Income = $44
B Price of fish / price of chicken = $8 / $4 = 2
C To buy a pound of fish the family has to give up 2 pounds of chicken
D MUfish / MUchicken = Price of fish / Price of chicken = $8 / $4 = 2
E If the price of chicken rises, the marginal utilities per dollar will not be equal. Specifically, MUfish / Price
fish > MUchicken / Price chicken. The family can raise its total utility by buying less chicken and more fish
3. Farah has $100 to spend each month on bread and chicken. Suppose the price of bread is $4 a loaf and
the price of chicken is $5 per pound.
a. Draw her budget constraint and label it BC0. Put bread on the horizontal axis and chicken on the
vertical axis. Be sure to identify the intercept values.
b. Suppose Farah is a utility maximizer and she consumes 10 loaves of bread and 12 pounds of chicken.
On the same graph you drew in part (a), draw an indifference curve to identify her optimal bundle.
Label this bundle "E."
c. Is her budget exhausted? Verify your answer.
d. Now suppose Farah's income falls to so that she can now devote $80 to the two goods. Prices
however remain unchanged. In the same diagram, graph her new budget constraint and label it BC1.
Be sure to identify any new intercept values.
e. Following the change in income, can Farah consume the same bundle "E"? Explain your answer.
f. What must happen to her total utility following the decrease in her income?
ANSWER:
a.
See the figure below
b.
See the figure below.
c.
d.
e.
f.
Yes, her budget is exhausted. She spends ($4 × 10) + ($5 × 12) = $100.
See figure below.
No, the bundle "E" is no longer affordable. it lies outside her budget line.
Her total utility falls.