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SECTION II ANSAVERS TO QUESTIONS

" Warm-up questions:

A(d). ( ). (b). D (

E (d). F (a). G (d). H (c). I (c). J (e). (a). L (b). M (e). N (d). 0 (e). P (b). Q(d)- R (a). S (a). T (c).

General questions:

1 (d). Only answer (d) implies that die quandty demanded will not decrease however high the price I goes. Answer (a) is quite consistent with the law of 1 demand since other things may not have remained constant between the two periods. 2 (d). The quanti- ty demanded at $4 is les-s than that at higher prices. 3 (b). Add the individual totals at each price to obtain I the market demand. However, were a litde squea-fmish about this one. For reasons that will become Iclear later, a market demand curve requires many buy-Icrs. 4 (a). 7 - 6. 5 (e). They must sum to 4 and not vio-llaic the law of demand. 3 & 1 will do this. Opuon (a) Bsums to 4 as required, but violates the law of demand. (d). A decrease in the price of bicycles results in a Bmovement along the demand curve, not in an increase pn demand. 7 (e). Opdon (a) refers to a movement Jalong a demand curve. 8 (d). The size of the crop fdoes not shift the demand curve. 9 (a). Natural gas Ws a substitute for petroleum. 10 (d). Answers (a) Pthrough (c) refer to complementary goods. 11 (e). Reccnt painful experience suggests that small cars are pubsdtutes, not complements for gas. the price gsf gas rose, the quandtv of small cars rose. In each lease, lower prices for siibsutute goods are involved. 12 Re). If anything, television and autos compete for leisure ume, and hence are likely to be .subsdtutes. nbe others are complements to autos. 13 (a). Formula pS. 14 (c). Again, refer to formula #3. Nothing can be pjdd aboiu total luility. 15(d). Reducing consuinp-pion of pretzels as a result of the price increase will, by Rhe assumpdon of diminishing marginal utility, lincrease the marginal utilitv of the last preuel as well Ps reduce total uulitv. 16 (c). Its the difference :tween what its wordi to you to consume the quanti-*ty purchased and die amount voii actually pay. 17 (d). Through an income of S15 a consimier would always [be better off spending all his income on bread. 0)mpare MU per dollar .spent. 18 (e). Fir.st recognize at this is a discrete problem since you are given every fprice and quantit). If the price is SIO, the consumer wil] buy 3 pounds. He values diem as worth $55. but le only has to pay $30, so his consumer surplus is $25. 19 (c). Subtract consumer surplus at S20 from the sur-

plus at $10. 20 (d). At a price of $2 die consumer surplus of all consumers ofthe type in the previous questions equals ($49) {\fiOQ). For the 1,000 of the type in question 20 it is ($80) (1,000). The total comes to $129,000. 21 (c). See answer to question 18. 22 (c). Only (c) affects the price of candy bars. Everything else shifts the curve. 23 (b). At this price four will be demanded; sum horizontally 24 (b). Options (a), (c), (e) must be referring to subsdtutes; opdon (d) involves a complete misunderstanding of demand curves. 25 (b). The ratio of the MUs = the rano of prices. 26 (e). Its 5 to 2. 27 (b). The only one not in the price rado of 2 to 1. 28 (b). The ratio is 3 to 2. 29 (b). The first thing to recognize is that this is a triangle problem since the numbers involved are far too large to be discrete. Next, draw the picture and label what you need to calculate. Then calculate the lowest price at which none will be demanded as $2.30. Finally, from the formula for the area of a triangle, estimate consumers surplus as (1/2) ($0.30) (300,000) = $4.5,000. 30 (e). Its $800,000. New C.S. is $845,000. Old is $45,000. The gain is the difference benveen them. 31 (e). The quandty demanded, not demand, would increase from 1 to 2 baskets. 32 (a). Since the consumer is willing to buy more at every price, theres been a demand increase by definidon. The information does not permit any inferences regarding tastes; other factors such as the price of stravvberries could well be responsible. 33 (a). Its a reasonable conjecture, but not the only possibility. 34 (e). Another discrete problem since you are given every price and quantity. C.S. in 1982 was S3.00. C.S. in 1983 was $7.50. Gain is $4.50. 35 (a). All but the decrease in the price of wine will increase the demand, therefore ceteris paribus consumer surplus will rise at the old price. A decrease in the price likewise increases the size of the triangle. 36 (e). The necessary condition is that the consumer spends all his money and that the marginal utility per dollar spent on all goods purchased be equal. 37 (e). First calculate die marginal utilities, then the marginal utilitx per dollar spent. The consumer will want to buy two \ylophoncs and five yo-yos, exhausting the S30 and consuming such that the marginal utilit) per dollar spent is equal. 38 (a). First recognize that this is a triangle problem since the numbers are too large to do bv di.screie nieth ods, then draw the picture. The area vou want to estimate is shaped as a trapezoid. The area of the rectangular portion is $10 and the area ofthe iriangtdar part is $5, so the total is SI5. 39 (b). Each of these consumers spends $450. which means thev must btiv three

mirrors at a price of $150. Iiowing that, calculate the •consumer surplus as $150 using the discrete method. 40 (e). Meets the utility maximization condiuon that Smiley spends all his money and that die marginal udlity per dollar spent is equal. 41 (e). The marginal util-

ity of the last yo-yo bought is 4 mils and that of thel xylophone is 2 utils, so the price ratio must be 2 \q (4/2). 42 (b) The Chiinnel is a substitute for the shji ping lines.

SECTION III: SUPPLY & EQUILIBRIUM

In this section we introduce supply and corn-Bine it with demand to show how capitalist economies ddress the problem of scarcity.

: SUPPLY

Just as an individuals demand curve shows the itiues he offers to buy ceteris paribus at various ices, so does a firms supply curve show the quand-ips it offers to sell at viariotis prices. Table I shows a firms 1 schedule (or just supply for short) for widgets id Figure I represents the same information graphi-adly as a supply curve. To read the quantit)- supplied the firm at the price of $6.00, we draw a horizontal line from $6.00 to the curve, and then drop a vertical lne to the quandty axis. In the graph the firm is will-ling to sell 3 widgets Lf the price is $6.00. Note that the hotol revenue (TR) of $18.00 (Pq=$18) received by the I firm at the price of $6.00, is given geometrically by the f shaded area. Of course, the shaded area likewise represents the total expenditure of the buyers at diis Jrice. The supply curve is drawn under the plausible assumpdon that more will be offered as the price rises, t>ut this is not inevitable.

SUPPLY

Just as we generate the market demand cur\e the horizonial summadon of its individual compo-

nent demand curves, we can likewise generate the market supply ciurve as the horizontal summadon of its component supply curves, at least as a Principles Course approximation. The numerical and graphical procedures are identical to those of demand. For example, in Figure II we derive the supply of oranges ill the southern Santa Barbara County by horizontally summing regional supply curves over the geographic area extending from Goleta to Carpimeria. Ai the price of $1.00 per pound, the quantity supplied in the South County, the market quantity, is 200 pounds (20 + 150-1-25 + 5) and is indicated by a dot. Of course.