Economics

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ECON120 Homework Problem Set #1 – Spring 2019

For all multiple choice questions, circle the letter of the ONE best answer.

1. (8 points) If people demand more of product A when the price of product B falls, then A and B are:

A. normal goods.

B. substitute goods.

C. complementary goods.

D. inferior goods.

E. None of the answer choices A→D are correct

2. (8 points) When the economy suffers a downturn and the incomes of many people decrease, vacationers are more likely to take car trips than to fly. Which of the following provides one possible explanation for this phenomenon?

A. Air travel and vacation travel by car are complementary goods.

B. Air travel and vacation travel by car are both normal goods.

C. Air travel is a normal good and vacation travel by car is an inferior good.

D. Air travel is an inferior good and vacation travel by car is a normal good.

3. (8 points) Suppose the equilibrium price of good Y is $5 and the equilibrium quantity is 150 units. If the price of good Y is $12:

A. the quantity demanded will be greater than 150 units.

B. the quantity supplied will be less than 150 units.

C. there will be an excess demand for good Y.

D. there will be an excess supply of good Y.

E. None of the answer choices A→D are correct

4. (8 points) The attack on the U.S. in 2001 severely reduced the number of offices available for lease/rent in downtown Manhattan (New York City). At the same time, believing that downtown Manhattan was a known terrorist target caused many businesses in the area to relocate to safer locations. Assuming no other changes in the commercial real estate market in downtown Manhattan, we should expect the lease/rent price for office space and Manhattan to increase. Indicate whether this statement is TRUE or FALSE; and then provide support for your answer.

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ECON120 Homework Problem Set #1 – Spring 2019

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5. (14 points – parts A, B, and C) Suppose people who are thinking about buying an existing home (i.e. demanders in the housing market) and current home owners who are thinking about selling their homes (i.e. suppliers in the housing market) suddenly believe that home prices are likely to be significantly lower next year than this year.

5A (4 pts.) Will this change in price expectations for next year cause the demand to purchase existing homes this year to increase or decrease? Explain.

5B (4 pts.) Will this change in price expectations for next year cause the supply of existing homes offered for sale this year to increase or decrease? Explain.

5C (6 pts.) What effect will this change in price expectations for next year have on the price of existing homes this year? Explain.

6. (6 points) Suppose one of your friends offered the following argument:

A rightward shift in demand will cause upward price pressure. The increase in price will cause a rightward shift of the supply curve, which would lead to downward price pressure. Therefore, it is impossible to tell what the overall effect of an increase in demand will have on price.

Do you agree with your friend? If so, explain why? If not, what is the flaw in your friend’s argument?

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ECON120 Homework Problem Set #1 – Spring 2019

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7. (8 points parts A→D) For each of parts A→D below, identify which of the following would generate a decrease in the market demand for e-book readers (e.g., Amazon’s Kindle, Barnes and Noble’s Nook, etc.). E-book readers are known to be normal goods. Write your answer in the space below each change in the market. Write YES if you think that the change would decrease market demand for e-book readers; and write NO if you think that the change will not decrease market demand for e-book readers.

7A (2 pts.) An increase in the price of downloadable apps utilized to enhance the e-book

reading experience.

7B (2 pts.) An increase in the number of consumers in the market for e-book readers.

7C (2 pts.) A decrease in the price of tablet devices, which are substitutes.

7D (2 pts.) A reduction in the incomes of consumers of e-book readers.

8. (8 points) Assume the market for smartphones is in equilibrium. Suppose the price of flash memory chips, an input used in manufacturing smartphones, increases. How will the equilibrium price and quantity of smartphones change?

A. The equilibrium price and quantity will both increase.

B. The equilibrium price and quantity will both decrease.

C. The equilibrium price will increase, but the equilibrium quantity will decrease.

D. The equilibrium price will decrease, but the equilibrium quantity will increase.

9. (8 points) In the Midwestern United States, the price of an ear of corn is always lowest in the summer. This seems strange because Midwestern consumers demand more ears of corn in the summer. Explain this observed behavior using the model of supply and demand.

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ECON120 Homework Problem Set #1 – Spring 2019

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10. (16 points) The focus of this question is the market for Airbnb property rentals in the State of Hawaii. Assume that the market for Airbnb property rentals in Hawaii is currently in a state of equilibrium. Now assume the two disturbances below happen simultaneously (i.e. at the same time):

· In order to encourage tourism, the government of the State of Hawaii offers Hawaiian homeowners a $100 subsidy (i.e. a payment made to homeowners from the state government) each time they make their home available to tourists for Airbnb rentals.

· In order of offset the state budget shortfall, the State of Hawaii implements a $75 airport tax on all arriving and departing fliers that are not residents of the State of Hawaii.

What are your expectations as to how these two simultaneous disturbances will likely affect the future equilibrium price of Airbnb property rentals and the future equilibrium quantity of Airbnb property rentals (i.e. how do you think the future equilibrium will compare to the equilibrium that existed before the disturbances took place)? To start with, explain how each disturbance, independently, would affect the future equilibrium price and quantity. Provide support for your position. Finally, present your overall conclusion and provide support for your answer.

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ECON120 Homework Problem Set #1 – Spring 2019

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11. (8 points – parts A and B) Use the tables below to answer this question about the market for Maine lobsters.

Supply Schedule

Price of lobsters per pound Quantity of lobsters supplied in pounds

$25 800

$20 700

$15 600

$10 500

$5 400

Demand Schedule – United States

Price of lobsters per pound Quantity of lobsters demanded in pounds

$25 200

$20 400

$15 600

$10 800

$5 1,000

Demand Schedule – France

Price of lobsters per pound Quantity of lobsters demanded in pounds

$25 100

$20 300

$15 500

$10 700

$5 900

11A (4 pts.) If Maine lobster catchers can only sell their lobsters in the United States, what is the equilibrium price AND quantity?

11B (4 pts.) If Maine lobster catchers can sell their lobsters in both the United States and France, what is the equilibrium price AND quantity?