1. Consider a society with 3 people (John, Eleanor and Abigail) who use the majority voting rule to decide how much to spend on a public park. There are 3 options, high (H), medium (M) and low (L) spending and the individuals rank the options in the following way:
Rank John Eleanor Abigail
1 M L H
2 L M M
3 H H L
- Who is the median voter? Why?
- Show the outcome of every possible pairwise election.
- Will majority voting lead to a consistent choice? If so, what is that choice?
- Suppose that Eleanor’s preference ordering changed to the following: First choice L, second choice H, and third choice M. Are Eleanor’s preferences in this case single or multiple peaked? Explain.
- Using Eleanor’s preferences from part d, how could Eleanor, if she were in charge of the agenda, arrange the pairwise voting to guarantee that her first choice wins?
2.
3. True or false and briefly explain
a. The MC of producing a public good is zero since additional consumers can enjoy the public good at zero MC.
b. Efficient provision of a public good requires that each member of society place the same value on the last unit
4. The price elasticity of demand for gasoline is -2.
- What effect will a 10% reduction in the quantity of gasoline placed on the market have on the price of gasoline?
- If the price of gasoline decreases by 3%, what will happen to the quantity of gasoline demanded?
5. Which would you expect to be more elastic, the demand for bananas or the demand for fruit? Why?
6. Generally, as you move up a demand curve (higher price) what happens to price elasticity of demand?
7. For each of the following find the price elasticity of supply.
a. P decreases 2% and quantity supplied decreases 5%
b. P increases 2% and quantity supplied does not change.
8. Michelle has decided she will buy 8 slices of pizza per week no matter what happens to price. What does this imply about her price elasticity of demand and the shape of her demand curve?
9. Demand is p = 25 - .25q
a. Using the point elasticity of demand formula find elasticity when P =10 and P = 20
b. Find TR at P = 10 and P = 20
10. Which would you expect to be more elastic, the demand for gasoline per week or the demand for gasoline per month? Why?
11. Amy and Pearl are contestants on a game show and both have accumulated $25,000 in winnings. Suppose the show's host offers each of them the option of taking a $25,000 check or of getting a $25,000 vacation. Amy prefers the cash to the vacation and Pearl is indifferent between the two. Use indifference curve analysis to explain the choices of Amy and Pearl. When comparing the quantity purchased of Vacation Pleasure and of money spent on all other goods assume that both have the same budget constraint.
12. Suppose a city is considering two tax plans to finance the building of a new recreation center.
Plan 1:a 20¢ tax on every gallon of gasoline sold within the city
Plan 2:a $100 annual tax on every person living in the city regardless of age or income
The government learns that both plans would raise the same amount of annual tax revenue. From the perspective of how these plans would each affect utility, discuss whether one plan is better than the other. Assume there are two goods; gasoline and money spent on other goods.
13. Draw a graph with video games on the horizontal axis and ice cream on the vertical axis. Joe has $100 per week to allocate between these commodities. The price of ice cream is $5. At the initial price for video games of $2.5, Joe purchases 10 ice cream and 20 video games. When the price of video games increases to $5, Joe purchases 8 ice cream and 12 video games. When the price of video games increases again to $7.5, Joe buys 5 ice cream and 10 video games.
a. Use this information to draw the utility maximizing points on a graph.
b. Draw the price-consumption curve.
c. Draw the individual demand curve for video games.
14. Suppose a consumer has income, M = 100, and faces prices, P
Z= 2 and P
K= 2. Using a neat, carefully drawn and labeled diagram, show the substitution and income effects resulting from a decrease in P
Kto 1, while M and P
Zremain constant when:
a. K is a normal good
b. K is an inferior good, but not a Giffen good
c. K is a Giffen good
Make sure that you clearly indicate the magnitudes of the income and substitution effects.
15. Based on the diagram below, explain why the consumer is not maximizing utility at point e
a. using the concepts of the price ratio and the MRS
b. using the concepts of the ratio of MU’s and the price ratio
H
e
G
16. Draw a diagram illustrating the consumer’s optimal consumption bundle of goods X and Y, when
a. the MRS is increasing
b. the MRS is decreasing and the consumer spends all of their money on X
c. the MRS is decreasing and the consumer spends all of their money on Y