Page 1 Mount Allison University Economics 1001 Sections A and B: Assignment 3 Due: 4 November 2013 NAME: STUDENT NUMBER:

TUTORIAL (LAB NUMBER, DAY, AND TIME): TUTORIAL LEADERS NAME: PROFESSORS NAME: MTA MAILBOX/UNIT NUMBER: Instructions: Please provide your answers in the spaces provided. 1. [20 points] Suppose the demand curve for the product is given by QD = 100 P, where P is the price. The supply curve is given by QS = 4P. (a) Find the equilibrium price and quantity of the good. Fall 2013

(b) Find the level of production and consumption that maximizes total social surplus.

Page 2 (c) At the ecient level of production, nd the following: i. ii. iii. iv. the total benet to consumers; the consumers surplus; the net benet to suppliers; total social benet.

Page 3 2. [15 points] Suppose that a policy maker wishes to make housing more aordable. To that eect, the policy maker wishes to ensure that the price that consumers pay for housing is below the market equilibrium price. (a) In the space below the question, draw a supply-demand diagram that illustrates the market equilibrium and the price that consumers will pay when the policy is in eect. (b) Using your diagram from part (a), illustrate the quantity of housing that consumers would like to purchase at the articially low price. Why will consumers not be able to purchase this amount of housing?

(c) Using your diagram from part (a), illustrate the social losses that result from the price ceiling. (d) Suppose that the policy maker instead decided to directly supply housing. On your diagram, illustrate how this might also bring about the lower price of housing that the policy maker desires.

Page 4 3. [20 points] The following table contains information on the utility a consumer receives from consuming yogurt and blueberries (the only two goods this consumer ever buys). Yogurt costs $2.00 per container and blueberries cost $3.00 per container. yogurt TU MU MU/$ 20 30 38 42 44 blueberries TU MU MU/$ 15 24 30 33 34

quantity 1 2 3 4 5

(a) Complete the table. (b) If the consumer has a budget of $17.00, how much will the consumer buy of each good? Explain.

(c) Is there a level of income at which the consumer would choose to buy 5 containers of yogurt and 4 containers of blueberries? If so, explain why and calculate the associated level of income. If not, explain why not.

Page 5 (d) Is there a level of income at which the consumer would choose to buy 2 containers of yogurt and 3 containers of blueberries? If so, explain why and calculate the associated level of income. If not, explain why not.

4. [20 points] A consumer buys only two goods, xylophones (X) and yams (Y). With xylophones on the horizontal axis, draw and identify the consumers budget line for each of the following situations on the same diagram. Label the intercepts and the slope of each budget line. (a) Xylophones cost $25 each, yams cost $2 per bag, and income is $500. (b) Xylophones cost $25 each, yams cost $2 per bag, and income is $300. (c) Xylophones cost $20 each, yams cost $2 per bag, and income is $500. (d) Xylophones cost $25 each, yams cost $4 per bag, and income is $300. (e) Xylophones cost $40 each, yams cost $2 per bag, and income is $400.

Page 6 5. [15 points] Consider a market with two consumers, Alphie and Betty. Their respective demand curves for apples are given by QD A = 100 2P, and QD B = 70 P.

(a) Show that Alphie will not buy any apples if the price is higher than 50, while Betty will not buy apples if the price exceeds 70.

(b) Find the market demand curve.

(c) Show Alphies demand curve, Bettys demand curve, and the market demand curve, all on the same graph.

Page 7 6. [10 points] Classify each of the following statements as true or false. Give a short justication for each of your choices. Illustrate your answers with graphs, where appropriate. (a) The demand curve always slopes downward for a normal good.

(b) Because diamonds have a higher price than water, we can conclude that diamonds are more valuable than water.

Page 8 7. [5 point Bonus] A Mystery The crew of a spaceship witnessed one of their crew ying away in an escape shuttle. The crew member has the ability to change appearance, allowing for a period of anonymity on a new planet. The captain of the vessel needs to contact the crew member to help with training a replacement. Ship records indicate that the crew member buys only blueberries and ice cream. These two goods are available on the ship for the same price, and the crew member buys 20 litres of blueberries and 10 litres of ice cream per celestial month. Ship sensors have been monitoring activity on the planet below. They have identied three creatures that consume only blueberries and ice cream. These beings are on separate islands, each with their own separate economies. The consumption habits of the creatures and the prices they face are outlined in the table below. Name Blueberries Consumption Price per litre Alpha 5 litres 1 credit Beta 10 litres 2 donners Gamma 30 litres 10 zolts Ice Cream Consumption Price per litre 20 litres 2 credits 5 litres 2 donners 5 litres 20 zolts

Assuming that the crew member left the ship in order to obtain more satisfaction from consumption, which creature is the crew member? Explain your reasoning. (Hint: draw the crew members budget line while on the ship.)