Assignment

PROBLEM SET 1

1. Based on the information provided below for the market for video games, answer the following questions:

a.) Draw and properly label the demand and supply graphs (this means you must label the axes and any lines you include on the graph).

b.) What is the equilibrium price and quantity?

Now, assume that a new government report claims that video game play stimulates the brain.

b.) What will this do to the demand curve? Of the list of things in the text that cause a change in demand, which best fits here as the cause of the demand shift?

c.) What will happen to the equilibrium price and quantity?

2. Based on the information provided below for the state of Montana, answer the following questions:

a.) Draw the Production Possibilities Curve.

b.) Determine the opportunity costs for a move from A to B; B to C; and C to D.

3. In the space provided below, do the following:

a.) Draw and properly label a demand and supply curve.
b.) Indicate where the equilibrium Price and Quantities are located.

c.) How do things change based on the following scenario?

• The market for hybrid cars is changing. There are more providers but due to bad publicity and poor performance, demand is falling.

Knowing this information, answer the following questions and then show the corresponding information in your graph:

d.) What is the market you are dealing with?

e.) Which curve(s) change(s)? Based on the lists in the text of what causes demand and supply to shift, what are the causes of these shifts?

f.) In what direction do they change?

g.) What happens to the equilibrium price and quantity after these changes are put into effect? Do they go up, go down, or stay the same?

4. Mario has reached a crossroads in his life. He is trying to decide whether to change careers. Currently, Mario makes pizzas, but he is considering entering a different line of work testing video games. Mario can either test 6 games or toss 12 pizzas in a day. Interestingly, Mario's friend Luigi is in a similar predicament. Luigi can test 3 games or toss 2 pizzas during a day.

Mario's opportunity cost of testing one game: ________2 Pizza___________________
(yes, you can test fractional games)

Luigi's opportunity cost of testing one game: ___________________________
(yes, you can test fractional games)

Mario's opportunity cost of tossing one pizza: ___________________________
(yes, you can have fractional pizzas)

Luigi's opportunity cost of tossing one pizza: ___________________________
(yes, you can have fractional pizzas)

Who has an absolute advantage in testing games? ________________________

Who has the comparative advantage in testing games? _____________________

Who has the comparative advantage in making pizzas? _____________________

PROBLEM SET 2

1. The following table presents data for wages in the market for Internet security professionals.

(Hint: In the labor market, the roles are reversed. Those who want to hire labor are the demanders. The workers enter the workforce providing labor to the marketplace, so they are the suppliers.)

a.) What is the equilibrium wage? ___________________________________

Now, consider this scenario: Due to an increase in Internet security threats, the government wants to apply a price control in this market to encourage more people to become Internet security professionals. Assume that a wage control is set at $75,000.

b.) Will this increase the number of people entering this labor market? Why or why not?

c.) Will this increase the number of people hired? Why or why not?

2. Assume you are a policymaker in Washington, DC. Lobbyists for the Preschoolers of America have put pressure on their representatives to cap prices on graham crackers. You have been assigned a position on a new committee to study the impact of a price ceiling on graham crackers.

Your job is to:

a.) Illustrate using a fully labeled supply and demand graph what such an artificial price looks like (label all the axes and any lines you put in your graph).

b.) Explain what the results of such a move are for the graham cracker market. In other words, will there be a shortage, a surplus, or neither created? Why?

3. Pollution is considered by most a negative externality. Some economists would like to see the costs of these burdens incorporated into the price of goods that we buy. For instance, since coal-fired power plants increase emissions that could potentially lead to climate change, these economists believe that the price we pay for electricity is not high enough.

a.) Draw a completely labeled graph and illustrate on the graph how much higher electricity prices would be if the full costs of electricity production were taken into account. You do not need to provide actual numbers; rather, show on the price axis where the price would be before the externality is considered and where the price would be after the externality is considered.

b.) What problems might exist in determining this new, externality-based price?

4. Using the information below about individuals and their willingness to pay for a bottle of ginger ale, calculate the total consumer surplus at a market price of $5.

Using the information below about willingness to supply ginger ale, calculate the total producer surplus at a market price of $5.

How do your answers change if the price falls to $2?