After reading chapters 4, 5, and 6 as indicated, do the following exercises:(textbook, Macroeconomics by William A. McEachern 9 or 10th ed are OK)
1. Using demand and supply curves, show the effect of each of the following on the market for cigarettes:
a. A cure for lung cancer is found.
b. The price of cigars increases.
c. Wages increase substantially in states that grow tobacco.
d. A fertilizer that increases the yield per acre of tobacco is discovered.
e. There is a sharp increase in the price of matches, lighters, and lighter fluid.
f. More states pass laws restricting smoking in restaurants and public places.
2. What happens to the equilibrium price and quantity of ice cream in response to each of the following? Explain your answers.
⦁ The price of dairy cow fodder increases.
⦁ The price of beef decreases.
⦁ Concerns rise about the fat content of ice cream. Simultaneously, the price of sugar (used to produce ice cream) increases.
3. Suppose the demand and supply curves for rental housing units have the typical shapes and that the rental housing market is in equilibrium. Then, government establishes a rent ceiling below the equilibrium level.
a. What happens to the quantity of housing available?
b. What happens to the quality of housing and why?
c. Who benefits from rent control?
d. Who loses from rent control?
e. How do landlords of rent-controlled apartments try to get tenants to leave?
4. Why is the price elasticity of demand for Coca-Cola greater than price elasticity of demand for soft drinks generally?
5. Suppose that 50 units of a good are demanded at a price of $1 per unit. A reduction in price to $0.35 results in an increase in quantity demanded to 85 units. Show that these data yield a price elasticity of 0.31. By what percentage would a 12 percent rise in the price reduce the quantity demanded, assuming price elasticity remains constant along the demand curve?
6. Calculate the income elasticity of demand for each of the following goods:
Quantity Demanded Quantity Demanded
When Income = $18,000 When Income = $31,000
Good 1 8 18
Good 2 6 4
Good 3 4 5
7. Some restaurants offer “all you can eat” meals. How is this practice related to diminishing marginal utility? What restrictions must the restaurant impose on the customer in order to make a profit?
8. The absolute value of the slope of the indifference curve equals the marginal rate of substitution. If two goods were perfect substitutes, what would the indifference curves look like? Explain.
9. Suppose that marginal utility of Good X = 98, the price of X is $15 per unit, and the price of Y is $6 per unit. Assuming that the consumer is in equilibrium and is consuming both X and Y, what must the marginal utility of Y be?
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