DEPARTMENT OF ECONOMICS
ECONOMICS 211.3 (05)
Intermediate Microeconomic Theory
ASSIGNMENT #1
Professor M. Huq DUE: Thursday, September 28, 2006
1. (6 marks) Petro Pete’s Gas Bar is having a “Roll Back the Clock on Prices” event to celebrate its 30th anniversary. At one pump, they are selling regular gas at 40 cents/litre, while all the other pumps are selling gas at 80 cents/litre. The lineup at the low-priced pump means a half-hour wait to get gas. Each of the following customers needs a full tank of gas.
a. Garfield Goyle, an attorney at a prestigious law firm, hates waiting in line. He figures his time is worth $200 an hour. His gas tank holds 80 litres. What is the cost per litre to him under each of the options, which option will he choose, and how much will he pay?
b. Raleigh Luckless is unemployed, and figures that waiting costs him nothing. His car has a 40-litre tank. Which option does he prefer, and why?
2. (6 marks) Melvin has decided to go skiing for the weekend, but (absentminded professor that he is) he has forgotten his skis. He has 4 options: (1) stay indoors for 3 days and read economics texts; (2) ski for 1 day, read economics 2 days; (3) ski for 2 days, read economics 1 day; or (4) ski for 3 days and forget about economics. The costs of skiing are as follows:
Transportation $100
Lodging $200
Ski pass $20 per day
Ski rental $25 per day
Melvin has also found out that the resort has a special three-day pass including rental for $75. He has already reached the ski slopes and he cannot cancel his room reservations. He values the benefit of reading economics texts at $100 per day, and of skiing at $130 per day. Which option will he choose, and why?
3. (10 marks) You've just been hired by the government of Prince Edward Island to give advice on the market facing PEI potato farmers. For each of the following events, determine the probable effect on the equilibrium price and quantity for PEI potatoes. Show whether the demand curve or the supply curve shifts.
- The United States eliminate restrictions on importation of PEI potatoes.
- A new strain of wonder potato is developed, which increases productivity but does not affect the taste.
- Potatoes are found to cause cancer in white mice.
- The price of rice increases.
- The price of fertilizer used in potato production increases.
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4. (10 marks) Because of the concerns that barbecuing meat using charcoal may cause cancer, the government decides to impose a 100 percent tax at the retail level on charcoal briquets. Suppose the daily demand for charcoal was P = 120 – 2Q and the supply was P = 30 + Q, where P is in dollars and Q is the number of 10-kg bags of charcoal sold daily.
a. Give the before-tax charcoal price and quantity exchanged.
b. Give the after-tax charcoal price to buyers, the quantity exchanged, and the total tax revenues.
c. How is the tax divided among sellers and buyers?
5. (6 marks) The Acme Seed Company charges $2 per kg for the first 10 kilograms you buy of marigold seeds each week and $1 per kg for every kilogram you buy thereafter. If your income is $100 per week, draw your budget constraint for the composite good and marigold seeds.
6. (6 marks) For each of the following, sketch:
a. A typical person’s indifference curves between garbage and the composite good.
b. Indifference curves for the same two commodities for Oscar the Grouch on Sesame Street, who loves garbage and has no use for the composite good.
7. (6 marks) Francis is an ascetic, for whom “more food and shelter is better”: until his basic
needs are met. After that point, since there is no free disposal, more food and shelter interfered with his spiritual meditation and makes him worse off. Draw his indifference curves.
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