Department of Economics
Introduction to Microeconomics
Problem Set 2
1. This question examines the impact of 5 events on the market for large automobiles with relatively low gas mileage and relatively high emission levels (think Hummer). Answer each part separately. For each event, indicate which curve (D or S) shifts, indicate in which direction (left or right) it shifts, and show in a demand-supply diagram in which direction the equilibrium price of these vehicles changes (up or down) and in which direction the equilibrium quantity of these vehicles changes (up or down). a) A recession lowers people’s incomes.
b) A strike by steelworkers raises steel prices.
c) Growing awareness of environmental issues causes more consumers to pay attention to the emissions levels of the vehicles they buy. d) Engineers develop new automated machinery that lowers the cost of producing these vehicles. e) The price of gasoline falls.
2. Consider the market for smartphones. In the last 5 years, the price of such phones has fallen while the quantity of such phones has increased. In a demand/supply diagram, what kind of shift (which curve, which direction) can produce this combination of changes in the equilibrium price and quantity? (You may assume that just one curve has shifted.)
3. Mankiw, Chapter 4, Problems & Applications # 14.
4. On a certain airline route, at a ticket price of $300, the number of passengers per week is 8000. If the ticket price were raised to $400, the number of passengers per week would fall to 7000. Using the midpoint method, calculate the price elasticity of demand for tickets.
5. Mankiw, Chapter 5, Problems & Applications #1, parts a, b and c.
6. Mankiw, Chapter 5, Problems & Applications #13.
7. Is the cross-price elasticity of margarine and butter positive or negative?
8. True or False. If false, explain...
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