Key

1. Yesterday you were unexpectedly given a free ticket to a Britney Spears concert scheduled for November 1.  The market price for the ticket is $75, but the most you could sell it for is only $50.  Today you discover that Pink Floyd will be having a reunion concert on the same evening.  Tickets for the Floyd concert are still available for $75.  Had you known before you received your Britney ticket yesterday that Pink Floyd would be coming, you definitely would have bought a ticket to see them, not her. 

True or false: Given the information above, it follows that if you are a rational decision maker, you should attend the Floyd concert.  Explain.

2. Brad and Angelina have rented a banquet hall to host a party in celebration of their wedding anniversary.  You are not one the invitation list.  Fifty people have already accepted their invitation.  Given that number the caterers will charge $4,000 for food and $1,000 for drinks.  The band will cost $3,000 and renting the hall will cost $1,000.  Now, Brad and Angelina are thinking about inviting you and 19 of your friends.  By how much will the extra guests increase the cost of the party.

3. Consider the market for cigarettes.  The demand and supply for cigarettes is given by:

Q_d = 286 - 80P                       Q_s = -80 + 40P,

where Q is the quantity of packs of cigarettes and P is the price of a pack.

a. Draw the market diagram and calculate the equilibrium price and quantity, and total welfare in the market (graph at end of answer).

b. In an effort to reduce cigarette consumption, the government decides to impose a per-unit producer tax of $1 on each pack of cigarettes.  Calculate the new market price and quantity.

c. Rather than a per-unit tax, suppose the government imposes a tax of 42% paid by consumers.  Calculate the new market price and output now.

4. Suppose that the market for air travel between Chicago and Dulles is served by just two airlines:  Delta and Southwest.  An economist has studied this market and has estimated that the demand curves for round trip tickets for each airline are as follows:

Q_D = 10,000 - 100P_D + 99P_S

Q_S = 10,000 - 100P_S + 99P_D,

where the subscripts D and S denote Delta and Southwest.

a. Suppose that both airlines charge a price of $300 for a round trip ticket.  What is the price elasticity of demand for Delta flights between Chicago and Dulles?

b. What is the cross-price elasticity of demand for Delta flights with respect to the price of Southwest flights?

c. What is the market level price elasticity of demand for air travel between Chicago and Dulles when both airlines charge $300.

5. Consider the market for electricity.  The monthly demand for electricity is given by:

Q = a + bP + cP_g + dI,

where Q is the quantity of electricity consumed per month, P is the price of electricity, P_g is the price of natural gas, and I is income.

a. Explain what sign you would expect the coefficients b, c and d to have.

b. Suppose you have the following information.

Derive the demand curve for electricity.