1.

Demand and Supply: The Basics

1. For each of the following simultaneous changes in demand and in

supply for a product, indicate the effect on equilibrium price and
equilibrium quantity.

(a) An increase in demand and an increase in supply

(b) A decrease in demand and a decrease in supply

(c) An increase in demand and a decrease in supply

2. Assume the market for leather baseball gloves is in equilibrium.

(a) Draw a correctly labeled graph of the market for leather baseball gloves,
labeling the price PE and the quantity QE at equilibrium.

(b) Now assume the price of leather increases, and it is an input used to
produce baseball gloves. Using a correctly labeled supply and demand graph,
show how this event affects the new equilibrium price and quantity for
baseball gloves, labeled P2 and Q2.

2. Elasticity, Taxation, and Consumer Choice

1. Analyze the following graph of the sugar market and how a per-unit
excise tax affects the following.
(a) What is the size of the tax per unit on the sugar market? (b) What is the
total amount of tax revenue from the tax?

(i) Is the tax incidence between consumers and producers equal, do

consumers pay more of the tax than producers, or do producers pay more of
the tax than consumers?

(c) What is the price that consumers pay for sugar after the tax?

(i) What is the after-tax, per-unit price received by producers for each sale?

(d) What was the equilibrium price and quantity before the tax?

(e) Now assume the price elasticity of demand becomes more inelastic, while
supply remains constant. Who will now pay more of the burden of the tax?
Consumers? Producers? Or will the burden of the tax be equal? Explain.

2. Analyze the following graph of the price of sugar in the United States
before and after a tariff is imposed.

(a) What is the price of sugar if there is no trade?

(b) Calculate the total consumer surplus both without trade and at the world
price. Show your work.

(c) Calculate the total tariff revenue at the world price with a tariff. Show
your work.

(d) What is the quantity of domestic supply at the world price both with and
without a tariff?

3. Assume the market for chicken wings is in equilibrium.

(a) Draw a correctly labeled graph of the chicken wing market, labeling the
price PE and the quantity QE at equilibrium.

(b) Assume the government now decides the price of chicken wings is too
high and decides to set an effective price ceiling in the market. Draw the
price ceiling on the same graph drawn in (a), labeling the new price PC, the
new quantity supplied QS, and the new quantity demanded QD.

(c) At the new price, is the chicken wing market in equilibrium, or does it
have a shortage or a surplus? Explain.

[Link] Micah spends $14 on burgers and slices of pizza every week. A
burger costs $4 and a slice of pizza is $2. Using the chart, answer the
following questions.

(a) What is the total utility of consuming 4 burgers?

(b) What is the quantity of burgers and slices of pizza that will maximize
Micah’s utility given that he spends $14?

(c) Now suppose a 10% increase in the price of a burger leads to a 5%

increase in the quantity of slices of pizza purchased. Calculate the cross-price
elasticity between burgers and pizza, and note if burgers and pizza are
complements, substitutes, or inferior goods. Show your work.
5. The following is a table showing Dana’s marginal benefit from purchasing
bottles of water and good X from a grocery store.

(a) What is Dana’s total benefit from purchasing 2 bottles of water and 1 unit of good X? Show your
work.

(b) Assume the price of a unit of good X is $5. Calculate the total consumer surplus if Dana
purchases 3 units of good X. Show your work.

(c) Now assume the price of a bottle of water is $3 and the price of a unit of good X is $6. Dana
spends her entire budget of $30 on bottles of water and good X.

(i) Explain why Dana does not maximize her benefit when she purchases 2 bottles of water and 4
units of good X. Use marginal analysis to explain your answer.

(ii) What are the optimal quantities of good X and bottles of water at these prices?

(iii) Suppose the price of a unit of good X drops to $3. Calculate Dana’s cross-price elasticity of
demand for bottles of water with respect to the price of good X, and state whether the two goods are
substitutes or complements. Show your work.

3. Perfect Competition
1. Assume the market for soybeans is perfectly competitive and in long-
run equilibrium, and Sam’s Soybeans is a small farm in the market.

(a) Draw correctly labeled side-by-side graphs of both the market for
soybeans and the firm, labeling the market equilibrium PM and QM, and
Sam’s Soybeans equilibrium PF and qF.

(b) Is Sam’s Soybeans earning economic profits, economic losses, or a

normal profit?

(c) Now assume that in the soybean market there is a huge drought that ruins
the soybean harvest of thousands of farmers (but not Sam’s). Show on the
same graph as above what would happen to the new equilibrium price and
quantity in both the market and firm, labeling the firm PM2 and QM2 and
Sam’s Soybeans PF2 and qF2.

(d) Shade in the area of economic profit or loss for Sam’s Soybeans at the
new equilibrium.

4. Monopoly

1. Draw a correctly labeled graph of an unregulated monopoly earning

economic profits, and identify each of the following on your graph.

(a) The profit-maximizing quantity and price, labeled QM and PM

(b) The area of economic profit, shaded in

(c) The deadweight loss also shaded in
(d) The allocatively efficient quantity, labeled QC

2. Grant’s Gas Guzzlers is a used car lot operating as a geographic

monopoly due to its remote location without any competition. Grant’s
Gas Guzzlers continues to produce despite having economic losses.

(a) Why might Grant’s Gas Guzzlers remain open despite the economic loss?

(b) Now assume Grant’s Gas Guzzlers is earning economic profits.

(i) At the profit-maximizing price, at what segment of the demand curve is
the firm operating at: the inelastic, unit elastic, or elastic range?

(ii) If Grant’s Gas Guzzlers increases its prices, what will happen to total
revenue?

(c) Now assume Grant’s Gas Guzzlers’ fixed costs increase. What will
happen to its profit-maximizing quantity? Explain.

5. Imperfect Competition: Monopolistic Competition and Oligopoly

1. Assume Carly’s Cafe is a coffee shop that is operating in a

monopolistically competitive industry. Carly’s Cafe is earning economic
profits.

(a) Draw a correctly labeled graph of Carly’s Cafe, and include the following
on the graph:

(i) The profit-maximizing price and quantity, labeled PM and QM

(ii) The area of economic profits, shaded in (iii) The productively

efficient output level, QP

(iv) The quantity of excess capacity

(b) What will happen to the number of firms in this monopolistically

competitive industry in the long run? Explain.

2. In a remote town there are only two indoor entertainment complexes,

Fields’ Fun House and Amazing Jake’s. The figure below shows the
profits for each firm if they price tickets high or low. Analyze the matrix
and answer the following questions. Fields’ Fun House is the first
number in each cell, and Amazing Jake’s is the second number.
(a) What type of market structure do these two firms operate in?

(b) Is there a dominant strategy for Amazing Jake’s? Explain.

(c) If Field’s goes low, where will Jake’s go?

(d) What is the game’s Nash equilibrium?

6. Resource Markets with Applications to Labor

1. The I.M. Green Company is a profit-maximizing firm that produces

and sells avocados in perfectly competitive product and labor markets.
Each avocado sells for $2 and the wage rate is $20 per day. See the short-
run production table for avocados below.
(a) What is the marginal revenue product of the 2nd worker?

(b) After which worker hired do diminishing marginal returns begin?

(c) What is the marginal product of the 4th worker?

(d) How many workers will be hired at a wage of $20 a day?

(e) If fixed costs are $30 and 5 labor units are hired, what is the economic
profit or loss?

(f) Now assume the wage rate increases to $30. How many workers will now
be hired?

2. Abby’s Apple Farm is a firm that operates in both perfectly

competitive product and labor markets.

(a) Using side-by-side graphs for the labor market and Abby’s Apples, label
the Farm Labor Market’s equilibrium wage and quantity WM and QM, and
Abby’s Apples equilibrium wage and quantity of labor hired WF and QF.

(b) Now assume that there is a significant increase in the number of farm
laborers in the market willing to work. What will happen to the following?

(i) Will the wage for workers in the Farm Labor Market increase, decrease, or
remain the same?

(i) Will the quantity of labor hired at Abby’s Apples increase, decrease, or
remain the same? Explain.

(c) Abby’s Apples is minimizing its costs with the cost-minimizing input
combination. Assume each apple-picking robot harvests 1,000 apples per
hour and rents for $50 an hour, and each farm laborer costs $10 an hour. How
many apples does each apple farm laborer harvest per hour? Show your work.

7. Government and Public Sector: Market Failure, Externalities, Public

Goods, Efficiency
1. Assume Firm A has been polluting rivers and lakes near its factory
while producing steel, causing a negative externality. Draw a correctly
labeled market for Firm A showing each of the following:

(a) The private market equilibrium price and quantity, labeled PM and QM

(b) The socially optimal quantity and price of production, labeled PS and QS

(c) The deadweight loss at the market equilibrium

(d) Explain what government action could result in a socially optimal

outcome.