KEY:______CHAPTER 1__________

1. You have had five equally weighted tests in a course and your test average in the class
has unfortunately fallen from 90 to 88 to 84 to 81 to 79 where it is now. What score did you
get on each exam? You have a final left that is weighted the same as the other tests. What is
the highest grade you can possibly get in the course if the six exams are all of the grade?

2. Most people conclude that the costs outweigh the benefits of dealing with grievances by a
suicide bombing attach. Yet some willingly engage in such activity. Are they miscalculating
or do they value costs and benefits differently? Explain. What does this tell us about cost-
benefit analysis?

3. A recent Wall Street Journal article told how nearly all short order food
restaurants are going to the single winding queuing line for their customers even
though it is less efficient than the self forming series of lines at the counter. Why do
you think this economically irrational behavior is occurring?

4. Find a newspaper clipping which relates to one point of the chapter outline shown
in this chapter. Identify which outline point is involved and how the story relates to
KEY: ______CHAPTER 2____________

1. Use a labor market supply and demand model to answer the following questions.
    a) From an equilibrium position a minimum wage is set above the going wage.
       Sketch graph this possibility and show 1) the amount of new entrants into the
       labor market, 2) the number of workers laid-off from their jobs.
    b) Is society better or worse off because of the new minimum wage law?

2. Find a newspaper clipping which relates to one point of the chapter outline shown
in this chapter. Identify which outline point is involved and how the story relates to

3. A public official once tried to calm public fears concerning a supply induced spike in
gasoline prices by saying, “The high price will reduce demand and therefore price will soon
fall again.” What is wrong with this statement?

4. NAFTA was designed to increase trade between countries in North America by
cutting tariffs for goods flowing between countries. If the demand function for US
computers in Mexico is P = 10 - Q, which supply curve would lead to the most
increase in trade after the tariffs are eliminated on computers? 1) S = 1 + Q     2)
S = 1 + .5Q Show graphically why your answer is correct.
KEY: ______CHAPTER 3____________

1. Your friend is a golfer so you buy him several dozen golf balls for his birthday. Although
   he is appreciative, you sense that he would rather have had a gift certificate at the golf
   shop. Show this circumstance in a sketch using indifference curves and budget lines.

2. Herbert spends all $50 of his paycheck on food and shelter which each cost $5 per
   a. What is the equation of his budget line?
   b. Sketch the budget line and two possible indifference curves that Herbert might
      have. One indifference curve should show Herbert spending his entire budget but
      consuming to much shelter. Label that point on the graph A. The other indifference
      curve should show Herbert optimizing his utility. Label the optimal point B.
   c. What is Herbert’s marginal rate of substitution between food and shelter when he is
      consuming his utility maximizing market basket?

3. Draw 4 budget lines for food and shelter as directed.
    a. the consumer has $500 income, faces an absolute price for shelter of 10, and a
       budget line slope of -5. ( Food is on the horizontal axis.)
    b. Given (a) above as a starting point, the price of each good doubles.
    c. Given (a) above as a starting point, the absolute price of food stays the same, but its
       relative price doubles.
    d. Given (a) above as a starting point, the absolute price of food is cut in half.
  KEY: ______CHAPTER 4____________

  Jenny’s situation is given by the graph below. Get your answers to the following four
  questions from the graph.

  1. What is the equation for the demand curve represented on the graph? Assume demand
     is linear.

  2. What is the price elasticity of demand at price 4?

  3. Is this commodity a normal or inferior good by all appearances? Show how you know
     by additional sketching on the graph.

  4. If a second person had a demand curve indentical to Jenny’s and they both made up the
     total market, what would the market demand function be?

  5. On the graph below sketch the income and substitution effects for a price increase of
     good X. Make the good an inferior good. Add any letters needed to indicate the
     locations of your answer.

Good $

                     4    6   8            12                               24
                                                                  Good X
6. On graph (a) below sketch a set of three budget lines and three indifference curves for
   goods X (horizontal axis) and good Y. (vertical axis). Then on graph (b) sketch an Engel
   curve from the information on graph (a). Structure your graphs so that the Engel curve
   will show a luxury good. To do this you will need to fill in numerical values for income
   and consumption on graph (a). You might want to experiment first to make sure your
   numbers lead to an Engel curve that shows Good X as a luxury good.
KEY: ______CHAPTER 5______________

1. Seth could consume $120 next year if he saved all his current earnings. He expects
to earn nothing next year. The intertemporal budget constraint for Seth is given by
the equation C2 = 120 - 1.2C1 where C1 = possible consumption in year 1 and C2 =
possible consumption in year 2. Assume that C1 is on the horizontal axis and C2 is on
the vertical axis.
   a. What is the present value of the total consumption available?
   b. What is the market interest rate?
   c. Seth will definitely consume zero in year 1 if his MRSC1 for C2 is less than ___________at
      all points on his indifference curve.
   d. Seth will definitely save nothing for next year if his MRSC1 for C2 is greater than ______at
      all points on his indifference curve.
   e. Assuming Seth starts from a position where he earns all his income in the beginning of
      year 1, sketch Seth’s intertemporal budget constraint and show one of his indifference
      curves for a case where he will save $20 for year two.

Yr. 2 Consumption


                  0                 80 100       Yr. 1 Consumption

2. If I spent all my money ($300,000) on a new house I could buy a house with 3000 square
feet. I settle for a 1500 square foot house. (Each square foot costs the same.) The day after I
close the deal a nearby nuclear power plant is condemned and the value of homes in the
entire area is cut in half. Show graphically what happens to my utility level and explain why
the result is plausible. Put numbers on your graph showing the wealth and housing
possibilities after the housing prices fall.
       ($300,000)             1


                                1500              3000
                                               Square Feet of Housing

   3. You manage a golf course and you know that the demand curve of each patron is
      identical with P = 30 – 2Q. Your marginal cost of providing services to your members
      is constant at 15. If you wanted to maximize your profits you will charge a fee of $15
      and then charge a membership fee of ___________________ per member? Graph
this problem and shade in the area on your graph that represents the membership fee
that each member pays at the beginning of the year. Show how much profit you
make if you charged $20 and made $5 on each

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