ECONOMICS 5050 -- First Homework Assignment                                         DUE: Mar. 7, 2005

PART I (10 points) (Use less than 200 words)
The US has a “Mixed Economy”. Explain what this means.  Try to be clear and include examples, but be concise.

PART II (30 points)
Using separate diagrams for each of the following, with supply and demand clearly labeled, please depict the effect on the equilibrium price and quantity of the good that will be produced and sold.  Each event is to be treated as independent of the others. Provide your answers in the form of a separate graph for each event. Be sure to label everything correctly and to indicate clearly the direction of any change in the market.

1.      The effect of a decrease in the price of cookies on the market for milk.

2.      The effect of an increase in the price of scones on the market for tea.

3.      The effect of a rise in the price of butter on the market for margarine.

4.      The effect of an improvement in production technology on the market for cell phones.

5.      The effect of a decrease in incomes on the market for Do-It Yourself Home Electrical books.

6.      The effect of a price ceiling on the market for apartments (rent control).

7.      The effect of “nesting” (when people want to spend more time at home with family - especially common in uncertain  or dangerous times) on the market for board games.

8.      The effect of a decrease in the price of cotton on the market for t-shirts.

9.      The effect of a decrease in incomes on the market for big screen TVs.

10.  The effect of a tax on the market for alcohol.

PART III (30 points)
A firm has fixed costs of \$120 and other costs as indicated in the table below.
1. Complete the table.

 Total Product Total Fixed Cost Total Variable Cost Total Cost Average Fixed Cost Average  Variable Cost Average  Total  Cost Marginal Cost 0 1 75 2 240 45 3 100 4 75

2.  a) If TFC are greater than 0 in a graph where should the ATC curve be relative to the AVC curve?

b) In the case of U shaped average cost curves:

Where will MC be the same as AVC?

Where will MC be the same as ATC?

3.  Sketch a typical set of average and marginal U shaped cost curves together on a graph with clear labels for each axis and each curve.

PART IV (30 points) For full credit you must SHOW YOUR WORK.
This part deals with demand and supply analysis. Assume a competitive market for a hypothetical consumer good. ("Competitive" means that no single buyer or seller has any control over the price of the good.)

Your graphs in this problem do not need to be to scale, but will probably help you to think through the problem so taking some care (perhaps more than one draft of the graphs) is advised.  Use algebra to identify the key points such as equilibria.
You are given the following information:

On the demand side, 5,000 units will be demanded per month when the market price is \$5.00. With every one-dollar price change, the quantity demanded changes by 1,000 units.

On the supply side, 2,000 units will be supplied per month when the market price is \$2.00. With every one-dollar price change, the quantity supplied changes by 2,000 units.

1. Establish demand and supply schedules for this market, and prepare a demand and supply diagram.

(Hint: The demand and supply equations will be helpful.

Recall from algebra the point slope formula for a line y - y1 = slope (x - x1),

or in this context P - P1 = slope (Q - Q1).   For P1 and Q1   you need to use the coordinates of one of the points on the line.  The slope is the change in the price that occurs as you move along the line for each unit change in quantity.)

2. Determine the equilibrium price and equilibrium quantity in this market.

3. Now assume that the government imposes a 20% excise tax on this product.  Determine the impact of this tax on the market supply of this good, and draw the new supply curve in your diagram.

4. Determine the new equilibrium price and equilibrium quantity in this market.

5. Determine the amount of monthly tax revenue which the government derives from this tax.

6. Determine the "incidence" of this tax (i.e., how the "burden" of this tax is shared between buyers and sellers).

7. Now determine the price elasticity of demand by calculating the elasticity coefficient, using the "mid-points formula," for the price range between the original and the new equilibrium price.

Hint: Recall the midpoints formula uses averages in getting the percentage change in quantity and percentage change in price to avoid the problem of elasticity estimates changing depending on the direction taken between the points.  The basic formula for elasticity is

| (Q2 - Q1)/ (Q1 + Q2)|
| (P2 - P1 )/(P1 + P2)|

Is the demand in this price range elastic, unit-elastic, or inelastic?

8. Use the "total revenue test" to give a rough check of your answer to the question above.

9. Then determine the price elasticity of supply along the original supply curve, for the same price range and using the same formula.

Is the supply in this range elastic, unit-elastic, or inelastic?

10. Finally, repeat the procedure to determine the price elasticity of supply along the new supply curve, for the same price range.