Homework 2-

Problem 1 - The following table gives the demand and supply for portable CD players at certain prices.  Assume that the demand and supply functions are linear.

(a) Calculate the demand and supply functions for this market. 

(b) Find the equilibrium price and quantity in this market.

(c) The government puts a tax of $5 on portable CD players, requiring producers to give the government $5 for every unit they sell.

(i) What will the new equilibrium price and quantity be? 

(ii) Calculate consumer and producer surplus and the government's tax revenue as a result of this policy.

(iii) Will the equilibrium price and quantity differ if consumers have to pay the tax to the government instead of the producers?

(d) Because of the popularity of ipods and mp3 players, the demand for portable CD players has decreased by 25%.  That is, at each price, people want to buy 25% less of the good.  Calculate the new demand curve and the new equilibrium (assuming, as in parts (a)-(b), that there is no tax).

Problem 2 - Are the following sales or production counted as part of Gross Domestic Product?  Explain your answers.

(a) I buy food from the local grocery store.

(b) Ford buys machinery to be used in plants in Detroit that produce cars.

(c) A thrift store sells used clothing to college students.

(d) I buy a new house in Madison.

(e) I buy a Honda that was produced in Japan.

(f) Ford buys steel that they use to make their cars.

Problem 3 - Firms A, B, and C in the fictional country of Paperland each contribute to the production of paper.  Firm A cuts down the trees and sells them to Firm B.  Firm B separates the cellulose fibers from impurities from the wood and sells it to Firm C.  Firm C puts the fibers into a sheet of paper and then sells it to the public. 

(a) Firm A sells enough wood for a ream of paper to Firm B for $3.75.  Firm B sells enough refined wood to produce a ream of paper to firm C for $6.25.  Firm C sold 888 reams of paper to consumers in Paperland in 2005, earning $6882 in revenue.  What is the value added by each firm per ream of paper?

(b) Assume the following cost information for each firm.  Using your answer from part (a), fill in the missing data points.

Problem 4 - Explain the difference between gross national product (GNP) and Gross Domestic Product (GDP).

Problem 5 - The isolated island of Oliveria is a closed economy that produces only widgets and olives.  In 2004, widgets cost $5, and they cost $7 in 2005.  Olives cost $0.35 in 2004, and the price of olives grew at the same rate as the price of widgets from 2004 to 2005.

(a) What was the price of olives in 2005?

(b) In 2004, 46 widgets and 89 olives were produced in Oliveria. What was the GDP of Oliveria in 2004?

(c) In 2005, Oliveria produced 53 widgets and 94 olives. 

(i) What was the nominal GDP in 2005?

(ii) What was the real GDP in 2005 (using 2004 prices)?