Topics: Supply and demand, Consumer theory, Elasticity Pages: 15 (2008 words) Published: September 12, 2013
Name: ________________________

Unit II: Supply, Demand, and Consumer Choice
Problem Set #2

1. EXPLAIN an experience or example that shows the “real world” application of each of the following. Define the terms in your own words and use examples that clearly demonstrate your understanding of each concept. a. The Law of Demand and the Law of Supply ( ____/5) Law of Demand: Downward slope, and inverse relation of price and quantity demand. When price of oranges goes up, the quantity demand will decrease, because of higher price, and substitutes. Law of Supply: Price and quantity has a direct relation, when price increases, quantity also increases. When the price of oranges increases, farmers will try to produce more, to maximize their profits. b. The Law of Diminishing Marginal Utility ( ____/5) When a person keeps buying the same product, this person will have decline in marginal utility from consuming additional products. A person that keeps buying a new Ferrari every week will eventually be bored of Ferrari, because of less utility provided by the Ferrari, and will change to buying Lamborghinis. c. Normal Goods and Inferior Goods ( ____/5)

Normal goods are luxury goods, and the demand for normal goods will increase when one’s income increases. Tom got promoted, and his annual income increase from $20000 to $400000, and now he can own a Ferrari, instead of a Toyota. Inferior goods are cheap goods, and the demand for inferior goods will increase when one’s income decreases. Tom got fired, and got a new job, his annual salary decreased from $400000 to $20000, and now he has to sell his Ferrari to buy a Toyota. d. Consumer’s Surplus and Producer’s Surplus ( ____/5) Consumer surplus: Quantity demanded is greater than quantity supplied. Most of the earth’s trees are gone, and only few factories can produces paper. The amount of paper needed for the consumers is greater than the amount of paper that can be produced. Producer’s surplus: Quantity supplied is greater than quantity demanded. There are thousand of paper factories and a lot of trees alive, but the increase of technology lowered the need for paper, so the paper produced is useless and creating a producer’s surplus.

2. Supply and Demand Worksheets (Pages 3 – 6)
a. Complete the study guide entitled “Demand and Supply Study Guide” ( ____/5) b. Complete the worksheet entitled “Demand and Supply Practice” ( ____/15)

3. Government Intervention:
a. EXPLAIN the results of the four following government policies. Be sure to draw each on a separate graph: price floor, price ceiling, production subsidy, and production quota. (____/5) b. The government often uses excise taxes, called “sin taxes,” to manipulate consumption of cigarettes. Draw and label the shift from a tax. Identify the new price consumers pay, the price producers receive, the amount of tax revenue consumers pay, and the amount of tax revenue producers pay. Lastly, EXPLAIN why it is unlikely that this tax will significantly reduce cigarette consumption. (____/5)

4. Practice FRQs: Applying S&D Analysis (Page 7)
a. Practice FRQ #1 and #2. ( ____/20)
b. Assume the following: The demand for all computers is price elastic. Laptop and desktop computers are substitutes. Laptops and DVD burners are compliments. Use three separate S&D graphs (laptops, desktops, and DVD burners) to show the impact of a change in technology that improves only the production of laptop computers on the following: ( ____/10) i. Price of laptop computers

ii. Output of laptop computers
iii. Total revenue of laptop computer producers iv. Price of desktop computers
v. Output of desktop computers
vi. Price of DVD burners
vii. Output of DVD burners

5. Elasticity
a. Give three...
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