Assignment

Instructions

• You can work in a group of maximum three persons. Please write your full names and Student ID No in your solution first page.

1) In Vancouver Sun newspaper, several fans and rock stars, were complaining the high price of concert tickets. One rock star argued, "It just isn't worth $75 to see me play. No one should have to pay that much to go to a concert." Assume this star sold out arenas around the country at an average ticket price of $75.

a. How would you evaluate the arguments that ticket prices are too high?

b. Suppose that due to this star's protests, ticket prices were lowered to $50. In what sense is this price too low? Draw a diagram using supply and demand curves to support your argument.

c. Suppose the rock star really wanted to bring down ticket prices. Since the band controls the supply of its services, what do you recommend they do? Explain using a supply and demand diagram.

d. Suppose the band's next CD was a total disaster. Do you think they would still have to worry about ticket prices being too high? Why or why not? Draw a supply and demand diagram to support your argument.

e. Suppose the group announced their next tour was going to be their last. What effect would this likely have on the demand for and price of tickets? Illustrate with a supply and demand diagram.

2) According to a Honda press release, sales of the fuel-efficient four-cylinder Honda Civic rose by 7.1% from 2016 to 2017. Over the same period, according to data from the U.S. Energy Information Administration, the average price of regular gasoline rose from $2.27 per gallon to $2.57 per gallon.

a. Using the midpoint method, define and calculate the cross-price elasticity of demand between Honda Civics and regular gasoline.

b. According to your estimate of the cross-price elasticity, are the two goods gross complements or gross substitutes? Does your answer make sense?

3) In 25 January 2018, "The New York Times" published an article which revealed that in 2017, the owners of the Atlanta Falcons (an American football team) lowered the prices of food in their stadium by 50%. Despite the decrease in prices, total expenditure per person increased by 16%. How can you explain this fact by using an economic concept you have learned in class so far? Use a graph to support your explanation. Label your diagram carefully.

4) Suppose that in 2005, the prices of burger and pizza were, respectively, $5 and $1 per slice. In 2015, after some inflation, the prices became $9 and $2, respectively. If we ignore income effects and assume there are no other goods, would you expect this person's consumption of burger and pizza to have changed? Explain.

5) A dad took his children to movie theatre. Afterwards, his eldest daughter bought an ice cream cone, and by the time they reached the car, she still had not finished. "Sweetie, it's new car and I don't like any stain on seats. Be careful with your ice-cream!", he told her. Couple of minutes later the ice-cream got melted and some drops of it spilled on the seat. Dad got angry, and she replied, "You love your car more than me!" He responded that this was partly .1e, and then told her why. What economic concepts did he used to tell her about?

6) Toronto's real estate market went crazy from 2013 to 2017. People would buy properties, the price would rise, then they would buy more. Does it mean the demand for housing was upward sloping? If yes, explain why? If no, what's a more reasonable explanation that is consistent with the law of demand?

7) People who are addicted to drugs, spend more of their possible income on drugs and get more drug-dependent which make it more difficult to lower drug use. How is their income elasticity to demand for drug?

8) It is common for supermarkets to carry both generic (store-label) and brand-name (producer-label) varieties of sugar and other products. Many consumers view these products as perfect substitutes, meaning that consumers are always willing to substitute a constant proportion of the store brand for the producer brand. Consider a consumer who is always willing to substitute four pounds of a generic store-brand sugar for two pounds of a brand-name sugar. Do these preferences exhibit a diminishing marginal rate of substitution between store-brand and producer-brand sugar? Assume that this consumer has $24 of income to spend on sugar, and the price of store-brand sugar is $1 per pound and the price of producer-brand sugar is $3 per pound. How much of each type of sugar will be purchased? How would your answer change if the price of store-brand sugar was $2 per pound and the price of producer-brand sugar was $3 per pound?

9) Tim Horton offers a frequent buyer program whereby a consumer receives a voucher each time she purchases one dozen bagels for $6. After a consumer accrues 10 vouchers, she receives one dozen bagels free. This offer is an unlimited offer, valid throughout the year. The manager knows her products are normal goods. Given this information, construct the budget set for a consumer who has $200 to spend on bagels and other goods throughout the year. Does Tim Horton's frequent buyer program have the same effect on the consumption of its bagels that would occur if it simply lowered the price of one dozen bagels by 3 percent? Explain

10) To encourage energy conservation, many public utility companies charge consumers a higher rate on units of electricity consumed in excess of some threshold amount. In contrast, a common marketing ploy by other firms is to offer "quantity discounts" to consumers who purchase large quantities of a good. To illustrate how these pricing schemes alter the typical consumer's opportunity set, suppose income =$100, Px=$2 if the consumer buys less than 40 units of X, Px=$3 if the consumer buys more than 40 units of X, and Py=$5. Draw the budget constraint. How would the budget constraint change if the price decreased to $1 after 40 units of X were consumed?