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TO ensure there is enough time to have dinner before the concert and return home not too late, you will have to take a taxi to the restaurant, which is right next to the concert hall, and then jack home after the concert. The two taxi rides will cost you a total of $60.

If you go to the tuition lesson as usual, you will spend only $30 on your dinner and you can walk to your student’s home. Assuming you are rational and there is no other cost you need to consider, what would have to be the minimum benefit you can get from the dinner and the concert to make you Willing to go Out With you friend tonight?I . 3 “NO matter what is the price Of an economics textbook, each student will buy at most only one copy. Therefore the market demand curve for an economics textbook is a vertical line. Explain whether this statement is true or false.

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Why do the prices of some goods, like airline tickets to Europe, go up during the months of heaviest consumption, while others, like sweet corn, go down (in summer)? 1 ,away is it common for bars ro provide free peanuts (or other crisps) but charge customers for drinking water? Hint: What is the major source of revenues and profits for bars? How would the pricing strategies mentioned in the question affect this source? ) Topic 2 2. 1 Explain With a demand-supply diagram in each Of the following cases how the equilibrium price and quantity of the good or service specified underlined) will change. If there is no equilibrium, explain what else will happen in the market.

A) If the price of ASS and WI fall, what will happen to 1 as 29 the price and quantity of Oxbow games if they are determined by market demand and supply? ) Between 2000 and 2010, advances in PC production technology have changed the supply of PC’s sharply. In the same period, the demand for PC’s has increased, but not as much as the change in supply. C) The price of potatoes rises and at the same time people become concerned that French fries can cause heart attacks. D) The Hong Kong government eased the minimum wage from $28 to $30 per hour on 1 May 2013. Assume that $28 was not an effective minimum wage whereas $30 was effective for Hong Songs unskilled workers when this change took place.

Explain how this change in minimum wage would affect the employment level of Hong Gong’s unskilled workers. Explain whether the total incomes of all the unskilled workers who managed to have a job would increase or decrease as a result. 2. Consider a competitive market with the following equations of demand (D) and supply Do: P = 60 – ! Sq SO: P = 20 + lass a) If this market has 1,000 consumers with identical individual demand curve, hat is the equation of the demand curve of each of these consumers? Hint: Denote the quantity demanded by each consumer by sq. ] b) Derive the equilibrium price (POP) and quantity (QUO) in this market. C) If the demand equation becomes ODL: P = 80 – WHQL while the supply remains as SO, derive the equilibrium price (P 1) and quantity (IQ).

D) If the supply equation becomes 52: P = 40 + has while the demand remains to be DO, derive the equilibrium price (UP) and quantity (SQ). E) Based on your answers in (b), (c) and (d), explain whether the changes in equilibrium are consistent with what o learn in class. Hint: You need to describe the changes in (c) and (d) before you explain how each of them affects the equilibrium. ] f) Based on your answer in (b), suppose the government sets a price ceiling at 60. Is it effective or not? If the government sets a price ceiling at 30, is it effective or not? In the case of the effective price ceiling, derive the size (quantity) of excess demand or excess supply. 2. 3 The Eastern Harbor Crossing increased the tolls by an average of 67% on 1 May 2006.According to the estimates of the Environment Minister DRP.

Sarah Lila SAA-dung, the higher lolls will eventually reduce the eastern tunnel’s traffic flow by 17% and raise the traffic flows of the Western Harbor Tunnel and the Cross-Harbor Tunnel by 21% and 3% respectively. A) Based on DRP. Olio’s estimates, describe the price elasticity of demand for the service of the Eastern Harbor Crossing and compare the closeness of substitution between the Eastern Harbor Crossing and the other two cross-harbor tunnels. ) CITY Pacific is a major stakeholder of both the Eastern Harbor Crossing and the Western Harbor Tunnel. Therefore the profit of this company will rise and fall with the joint refit of the two tunnels, other things being equal. Assume that the costs of operating the tunnels will remain unchanged despite the changes in the traffic flows of each of them. Based on your answer in (a), explain with appropriate diagrams whether CITY Pacific will gain or lose from the increase in tolls. Hint: Although in reality the tunnels charge different types Of vehicle different tolls, for simplicity, assume in your analysis that each tunnel only charges a fixed amount of toll on all vehicles.

] 2. Suppose there are two goods A and B that have the same supply curve ND the same equilibrium price and quantity as shown in the following diagram. Suppose the two goods A and B have the following features: i) A has more close substitutes than B; ii) B is more necessary for its consumers than A; iii) A occupies a larger share of its consumers’ budget than a.

) Define price elasticity of demand. With reference to the above features, explain which of the goods faces a more elastic demand at the equilibrium point. Identify which of the demand curves in the above diagram denotes Ass demand and which one denotes Bi’s demand. Explain your answer briefly.

B) Suppose ere-unit tax of $5 is imposed on both A and B. Draw the above diagram in your answer book and show how the per-unit tax will affect the market equilibrium of A and B. From which good can the government collect more tax revenue?Explain your answer with reference to the diagram. C) Which group of consumers (A or B) will bear a larger share of the tax burden? Explain your answer with reference to the diagram. 2. 5 The demand and supply for cups in City Artist have the following characteristics: each buyer w demand either zero or one cup, and each seller will supply either zero or one cup. The buyer will demand one cup if the market price is below or equal to his reservation price, and the seller will supply one cup if the market price is above or equal to his marginal cost.The number of buyers at each reservation price and the number of sellers at each marginal cost are shown in the following table: Reservation price (maximum price willing to pay) Number of buyers Quantity demanded Marginal cost (minimum price willing to receive) sellers Quantity us applied $80 10 15 $70 20 $60 25 $50 35 $40 $30 $20 30 $10 Fill in the missing values of “quantity demanded” and “quantity supplied” for ACH of the market prices as given by the two price columns.

Then answer TTL- following questions showing clearly your calculations. ) What are the equilibrium price and quantity of cups in this market? B) At this equilibrium, what are the magnitudes of consumer surplus, producer surplus and social surplus? C) Now suppose the government in City Artist imposes a per-unit et of $30 on the producers for each cup produced and sold. What are the new equilibrium price and quantity of cups? What is the tax revenue that the government can raise from the transactions of cups in this city? How is the ax shared between the producers and buyers of cups (expressed in percentage of total)? ) What are the magnitudes of the consumer surplus and producer surplus after the imposition of the tax? What is the deadweight loss? [Hint: The social surplus in this case should also include the tax revenue; collected by the government. ] Topic 3 3. 1 Alice Ltd. Makes cakes and then sells them to the customers.

The follower table shows the relationship between the number of workers and Lice’s output in a given day: Workers Output Marginal product Total cost Average total cost Marginal cost 2 50 3 90 4 120 5 140 6 150 7 155 ) Fill in the column of the marginal product.

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