Original Quantity Demanded:
New Quantity Demanded:
Original Price:
New Price: 240
180
$3.99
$4.99 a. Calculate the price elasticity of demand for the magazines. Is the demand elastic or inelastic?
b. Based on the elasticity for the magazines above, would you expect the total revenue to
increase or decrease? Use a supply and demand graph to justify your answer. 6. Suppose the minimum wage for a particular industry is set at $10 per hour, while the current
equilibrium wage is $12 per hour. What effect will the minimum wage have on the price and
quantity of labor?
7. Suppose the average rent for studio apartments in Kalamazoo is $380. Rent control is put in place
so that studio apartments can only cost $350. What will happen to the rental market for studio
apartments in the short run? In the long run?
8. How would elasticity of studio apartments affect the outcome above in question 7?
9. Howard really likes to eat at a local pub, and he only ever orders bratwurst. The cost of a meal of
bratwurst at the pub is $11, and his benefit is described by the table below for the number of
meals eaten in a week:
Number of
Meals Eaten Total
Benefit 1 $25.00 2 $45.00 3 $62.00 4 $77.00 5 $89.00 6 $98.00 7 $102.00 a. How many meals per week will Howard purchase at the pub?
b. What is the most a meal could cost for Howard to eat at the pub all seven days?
10. Explain what we mean by the positive externality of education. What other things create positive
externalities?
11. Explain what we mean by the negative externality of pollution. What other things create negative
externalities?
12. Imagine a game between Harvard and Yale in which each team must choose whether to employ
the flying wedge (a violent football tactic). Each team’s best outcome is to be the only team that
employs the flying wedge. However, the players on both teams are better off if neither team
employs the wedge than if both teams employ the wedge, since serious injury is much less likely.
Answer the following questions:
a. Describe the structure of this game using a payoff matrix. Can you tell which of our basic
games this one matches in structure?
b. Does either team have a dominant strategy? Explain.
c. What are the Nash equilibria for this game? Explain.
d. What is the likely outcome of this game? Explain.
e. Which of our five standard games does this seem to match? 13. Regulation is often a way of addressing inefficient outcomes. In the game above, suppose the
NCAA institutes penalties for violent tactics such as the flying wedge. Explain how these penalties
can alter the structure of the game above so that the likely outcome (based on dominant
strategies) becomes the one where neither team employs a flying wedge.
14. The year is 1778, and the Continental Army desperately needs to get supplies through to their
troops at Valley Forge. A caravan of four wagons has left Philadelphia and must decide how to
proceed. All four wagons can take the eastern route to Valley Forge, or the wagons can split up
and two can take the western route instead. (The western route is too slow for all four wagons.)
However, British Redcoats have intercepted dispatches that indicate the caravan is on its way. The
British commander has just enough time to deploy two groups of scouts. He must choose whether
to deploy both groups to the east, in order to maximize chances of spotting the caravan there, or
split the groups up and send one to the west instead.
If the entire caravan goes to the east and the British scouts also all go east, then the Redcoats will
likely intercept and capture three of the four wagons.
If the entire caravan goes east but the British split up their scouts, only two wagons will likely be
captured.
If the caravan splits up and the British concentrate both scout groups to the east, only one wagon
will be intercepted and captured.
Finally, if both the British and the Continentals choose to split up, two wagons (one each
direction) will likely be captured.
Game Theory wasn’t around yet in the 1770s, but if you were to go back in time and use game
theory to analyze the situation, you could make better decisions. What should each side do?
15. Compare and contrast perfect competition with monopoly. In particular, focus on how a firm
determines quantity to produce, what determines the price that is set, and what the firm’s profit
will be in each case. Use graphs to support as appropriate.
16. Apply the various economic tools from our course to the following decision scenario:
Should Michigan privatize its school systems? What are the economic considerations that
are relevant to this decision? What do they suggest? Discuss.
(The fact that you will have a full page suggests that I expect a fair bit of discussion here. Show me
what you know!)
17. Explain whether each of the following statements are true or false:
a. “There are some times when it is better not to play a dominant strategy in a game.”
b. “Monopolistic competition always results in an economic profit for the firm.”
c. “Firms will enter a market when there is still profit to be made, but will exit the market as
soon as the profit hits zero.”
d. “The more elastic a product is, the less tax revenue will be raised if we tax the product.”” 18. Define the following terms:
a. Public good
b. Externality
c. Elasticity
d. Markup
e. Marginal Cost
19. Consider the following graph: a. Before the tax of $9 per unit is imposed, what is the consumer surplus? The producer
surplus? What is the total surplus?
b. After the $9 tax is imposed, how much tax revenue is generated?
c. After the tax, how much consumer and producer surplus remain? What is the new total of
surplus? (Don’t forget the tax!)
d. What is the deadweight loss? What does deadweight loss mean?
