Tutorial Questions

Topics: Costs, Supply and demand, Marginal cost Pages: 22 (7413 words) Published: April 21, 2015
Tutorial Questions
Topic 1
1.1Mary and Margaret have the same preferences and incomes. Just as Mary arrived at the cinema to watch a 3D movie, she discovered that she had lost the $100 ticket she had purchased earlier. Margaret also just arrived at the cinema planning to buy a ticket to watch the same movie when she discovered that she had lost a $100 note from her wallet. If both Mary and Margaret are rational (who make decisions to maximize economic surplus) and both still have enough money to pay for the ticket, is one of them more likely than the other to go ahead to watch the movie anyway? 1.2Your good friend asks you to go with her to a concert tonight. But you have already scheduled to give a tuition lesson to a secondary school student and you cannot reschedule the lesson to another time. To go to the concert, you will have to cancel the lesson, from which you could earn $200. To go with your friend to the concert, you will have to pay $500 for the ticket and spend $100 eating dinner with her at a nice restaurant. To ensure there is enough time to have dinner before the concert and return home not too late, you will have to take a taxi to the restaurant, which is right next to the concert hall, and then back home after the concert. The two taxi rides will cost you a total of $60. If you go to the tuition lesson as usual, you will spend only $30 on your dinner and you can walk to your student’s home. Assuming you are rational and there is no other cost you need to consider, what would have to be the minimum benefit you can get from the dinner and the concert to make you willing to go out with you friend tonight? 1.3“No matter what is the price of an economics textbook, each student will buy at most only one copy. Therefore the market demand curve for an economics textbook is a vertical line.” Explain whether this statement is true or false. 1.4Why do the prices of some goods, like airline tickets to Europe, go up during the months of heaviest consumption, while others, like sweet corn, go down (in summer)? 1.5Why is it common for bars to provide free peanuts (or other crisps) but charge customers for drinking water? [Hint: What is the major source of revenues and profits for bars? How would the pricing strategies mentioned in the question affect this source?]

Topic 2
2.1Explain with a demand-supply diagram in each of the following cases how the equilibrium price and quantity of the good or service specified (underlined) will change. If there is no equilibrium, explain what else will happen in the market. a) If the price of PS3 and Wii fall, what will happen to the price and quantity of Xbox games if they are determined by market demand and supply? b) Between 2000 and 2010, advances in PC production technology have changed the supply of PCs sharply. In the same period, the demand for PCs has increased, but not as much as the change in supply. c) The price of potatoes rises and at the same time people become concerned that French fries can cause heart attacks. d) The Hong Kong government raised the minimum wage from $28 to $30 per hour on 1 May 2013. Assume that $28 was not an effective minimum wage whereas $30 was effective for Hong Kong’s unskilled workers when this change took place. Explain how this change in minimum wage would affect the employment level of Hong Kong’s unskilled workers. Explain whether the total incomes of all the unskilled workers who managed to have a job would increase or decrease as a result. 2.2Consider a competitive market with the following equations of demand (D) and supply (S). D0: P = 60 – ½Qd

S0: P = 20 + ½Qs
a) If this market has 1,000 consumers with identical individual demand curve, what is the equation of the demand curve of each of these consumers? [Hint: Denote the quantity demanded by each consumer by qd.] b) Derive the equilibrium price (P0) and quantity (Q0) in this market. c) If the demand equation becomes D1: P = 80 – ½Qd while the supply remains as...
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