BS Accounting and Finance-I

Introduction to Economics
Course instructor: Aysha Khatoon
Assignment 01
Due date: 08 September 2021 (By hand+ submit on LMS)

Question: 01
A survey indicated that chocolate is Americans’ favorite ice cream flavor. For each of the following,
indicate the possible effects on demand, supply, or both as well as Equilibrium price and quantity of
chocolate ice cream.
a. A severe drought in the Midwest causes dairy farmers to reduce the number of milk-producing
cattlein their herds by a third. These dairy farmers supply cream that is used to manufacture chocolate ice
cream. b. A new report by the American Medical Association reveals that chocolate does, in fact, have
significant health benefits.
c. The discovery of cheaper synthetic vanilla flavoring lowers the price of vanilla ice cream.
d. New technology for mixing and freezing ice cream lowers manufacturers’ costs of
producingchocolate ice cream.

Question: 02
In Rolling Stone magazine, several fans and rock stars, including Pearl Jam, were bemoaning the high
price of concert tickets. One superstar argued, “It just isn’t worth $75 to see me play. No one should
have to pay that much to go to a concert.” Assume this star sold out arenas around the country at an
average ticket price of $75.
a. How would you evaluate the arguments that ticket prices are too high?
b. Suppose that due to this star’s protests, ticket prices were lowered to $50. In what sense is this
pricetoo low? Draw a diagram using supply and demand curves to support your argument.
c. Suppose Pearl Jam really wanted to bring down ticket prices. Since the band controls the supply ofits
services, what do you recommend they do? Explain using a supply and demand diagram.
d. Suppose the band’s next CD was a total dud. Do you think they would still have to worry about ticket
prices being too high? Why or why not? Draw a supply and demand diagram to support your argument.
e. Suppose the group announced their next tour was going to be their last. What effect would this likely
have on the demand for and price of tickets? Illustrate with a supply and demand diagram.

Question: 03

Demand twisters: Sketch and explain the demand relationship in each of the following statements.

a. I would never buy a Britney Spears CD! You couldn’t even give me one for nothing.
b. I generally buy a bit more coffee as the price falls. But once the price falls to $2 per pound, I’ll buy
out the entire stock of the supermarket.
c. I spend more on orange juice even as the price rises. (Does this mean that I must be violating the lawof
 demand?)
d. Due to a tuition rise, most students at a college find themselves with less disposable income. Almost
all of them eat more frequently at the school cafeteria and less often at restaurants, even though prices at
the
cafeteria have risen, too. (This one requires that you draw both the demand and the supply curves for school
cafeteria meals.)

Question: 04

Will Shakespeare is a struggling playwright in sixteenth-century London. As the price he receives for
writing a play increases, he is willing to write more plays. For the following situations, use a diagram to
illustrate how each event affects the equilibrium price and quantity in the market for Shakespeare’s plays.
a. The playwright Christopher Marlowe, Shakespeare’s chief rival, is killed in a bar brawl.
b. The bubonic plague, a deadly infectious disease, breaks out in London.
c. To celebrate the defeat of the Spanish Armada, Queen Elizabeth declares several weeks of
festivities, which involves commissioning new plays.

Question: 05

The small town of Middling experiences a sudden doubling of the birth rate. After threeyears, the birth
rate returns to normal. Use a diagram to illustrate the effect of these events on the following.
a. The market for an hour of babysitting services in Middling today
b. The market for an hour of babysitting services 14 years into the future, after the birth rate has
returned to normal, by which time children born today are old enough to work as babysitters
c. The market for an hour of babysitting services 30 years into the future, when children born today are
likely to be having children of their own

Question: 06
Use a diagram to illustrate how each of the following events affects the equilibrium priceand quantity of
pizza.
a. The price of mozzarella cheese rises.
b. The health hazards of hamburgers are widely publicized.
c. The price of tomato sauce falls.
d. The incomes of consumers rise and pizza is an inferior good.
e. Consumers expect the price of pizza to fall next week.

Question: 07
The accompanying table gives part of the supply schedule for personal computers in theUnited States.
Price of computer Quantity of computers supplied
$1,100 12,000
$900 8,000

a. Calculate the price elasticity of supply when the price increases from $900 to $1,100 using the
midpoint method.

b. Suppose firms produce 1,000 more computers at any given price due to improved technology. As
price increases from $900 to $1,100, is the price elasticity of supply now greater than, less than, or the
same as it was in part a?
c. Suppose a longer time period under consideration means that the quantity supplied at any given
price is 20% higher than the figures given in the table. As price increases from $900 to $1,100, is the
price elasticity of supply now greater than, less than, or the same as it was in part a?

Question: 07
The accompanying table lists the cross-price elasticity’s of demand for several goods, where the
percent quantity change is measured for the first good of the pair, and the percent price
change is measured for the second good.

Good Cross-price elasticities of

demand
Air-conditioning units and kilowatts of -0.34
electricity
Coke and Pepsi +0.63
High-fuel-consuming sport-utility vehicles -0.28
(SUVs)and gasoline
McDonald’s burgers and Burger King burgers +0.82
Butter and margarine +1.54

a. Explain the sign of each of the cross-price elasticity’s. What does it imply about
the relationshipbetween the two goods in question?
b. Compare the absolute values of the cross-price elasticity’s and explain their
magnitudes. For example, why is the cross-price elasticity of McDonald’s burgers and
Burger King Burgers less than thecross-price elasticity of butter and margarine?
c. Use the information in the table to calculate how a 5% increase in the price of
Pepsi affects thequantity of Coke demanded.
d. Use the information in the table to calculate how a 10% decrease in the price of
gasoline affects thequantity of SUVs demanded.

Question:08
The accompanying table shows the price and yearly quantity sold of souvenir T-shirts in
the
town of Crystal Lake according to the average income of the tourists visiting.
Price of Quantity of T-shirts Quantity of T-shirts
T-shirt demanded when the demanded when the
average tourist income is average tourist income is
$20,000 $30,000
$4 3,000 5,000
$5 2,400 4,200
$6 1,600 3,000
$7 800 1,800
a. Using the midpoint method, calculate the price elasticity of demand when the price of
a T-shirt risesfrom $5 to $6 and the average tourist income is $20,000. Also calculate it
when the average tourist income is $30,000.
b. Using the midpoint method, calculate the income elasticity of demand when the price of
a T-shirt is
$4 and the average tourist income increases from $20,000 to $30,000. Also calculate it
when the priceis $7.