ECONOMICS 5050  First Homework Assignment DUE: Mar. 7, 2005
PART I (10 points) (Use less
than 200 words)
The US has a “Mixed Economy”. Explain what this means. Try to be clear and include examples,
but be concise.
PART II (30 points)
Using separate diagrams for each of the following, with supply and
demand clearly labeled, please depict the effect on the equilibrium price and
quantity of the good that will be produced and sold. Each event is to be treated as independent of the others.
Provide your answers in the form of a separate graph for each event. Be sure to
label everything correctly and to indicate clearly the direction of any
change in the market.
1. The effect of a decrease in the price of cookies on the market for milk.
2. The effect of an increase in the price of scones on the market for tea.
3. The effect of a rise in the price of butter on the market for margarine.
4. The effect of an improvement in production technology on the market for cell phones.
5. The effect of a decrease in incomes on the market for DoIt Yourself Home Electrical books.
6. The effect of a price ceiling on the market for apartments (rent control).
7. The effect of “nesting” (when people want to spend more time at home with family  especially common in uncertain or dangerous times) on the market for board games.
8. The effect of a decrease in the price of cotton on the market for tshirts.
9. The effect of a decrease in incomes on the market for big screen TVs.
10. The effect of a tax on the market for alcohol.
PART III (30 points)
A firm has fixed costs of $120 and other
costs as indicated in the table below.
1. Complete the table.
Total
Product 
Total
Fixed Cost 
Total
Variable Cost 
Total
Cost 
Average
Fixed Cost 
Average

Average

Marginal
Cost 
0 







1 

75 





2 


240 



45 
3 





100 

4 




75 


2. a) If TFC are greater than 0 in a graph
where should the ATC curve be relative to the AVC curve?
b) In the case of U
shaped average cost curves:
Where will MC be the same as AVC?
Where
will MC be the same as ATC?
3. Sketch a typical set of average and marginal U shaped cost curves together on a graph with clear labels for each axis and each curve.
PART IV (30 points) For full credit you must SHOW YOUR
WORK.
This part deals with demand and supply analysis. Assume a competitive market
for a hypothetical consumer good. ("Competitive" means that no single
buyer or seller has any control over the price of the good.)
Your graphs in this problem do not need to be to scale, but
will probably help you to think through the problem so taking some care
(perhaps more than one draft of the graphs) is advised. Use algebra to identify the key points
such as equilibria.
You are given the following information:
On the demand side, 5,000 units will be demanded per month when the market price is $5.00. With every onedollar price change, the quantity demanded changes by 1,000 units.
On the supply side, 2,000 units will be supplied per month when the market price is $2.00. With every onedollar price change, the quantity supplied changes by 2,000 units.
1. Establish demand and supply schedules for this market, and prepare a demand and supply diagram.
(Hint: The demand and supply equations will be helpful.
Recall from algebra the point slope formula for a line y  y_{1} = slope (x  x_{1}),
or in this context P  P_{1} = slope (Q  Q_{1}). For P_{1 }and Q_{1 }you need to use the coordinates of one of the points on the line. The slope is the change in the price that occurs as you move along the line for each unit change in quantity.)
2. Determine the equilibrium price and equilibrium quantity in this market.
3. Now assume that the government imposes a 20% excise tax on this product. Determine the impact of this tax on the market supply of this good, and draw the new supply curve in your diagram.
4. Determine the new equilibrium price and equilibrium quantity in this market.
5. Determine the amount of monthly tax revenue which the government derives from this tax.
6. Determine the "incidence" of this tax (i.e., how the "burden" of this tax is shared between buyers and sellers).
7. Now determine the price elasticity of demand by calculating the elasticity coefficient, using the "midpoints formula," for the price range between the original and the new equilibrium price.
Hint: Recall the midpoints formula uses averages in getting the percentage change in quantity and percentage change in price to avoid the problem of elasticity estimates changing depending on the direction taken between the points. The basic formula for elasticity is
 (Q_{2}  Q_{1})/ (Q_{1} + Q_{2})
 (P_{2}  P_{1} )/(P_{1} + P_{2})
Is the demand in this price range elastic, unitelastic, or inelastic?
8. Use the "total revenue test" to give a rough check of your answer to the question above.
9. Then determine the price elasticity of supply along the original supply curve, for the same price range and using the same formula.
Is the supply in this range elastic, unitelastic, or inelastic?
10. Finally, repeat the procedure to determine the price elasticity of supply along the new supply curve, for the same price range.