BOAZ UNIVERSITY | DEPARTMENT OF ECONOMICS EC 101.

04 | INTRODUCTION TO MICROECONOMICS | FALL 2011

PROBLEM SET 1 OCTOBER 6, 2011 DUE ON TUESDAY (IN CLASS), OCTOBER 18, 2011 ALSO PLEASE NOTE THE FOLLOW ING UPCOMING DATES: OCTOBER 6, THURSDAY, 17-18:00 OFFICE HOUR @IB209A WITH ALAR DEDE OCTOBER 13, THURSDAY, 17-18:00 REVIEW SESSION @NB119 WITH ALAR DEDE IF YOU CANNOT MAKE THESE HOURS YOU CAN ALW AYS FIND ME DURING MY OFFICE HOURS TUES & WEDS 15-16:30 NB 221

QUESTION 1. When it comes to flashy consumer goods, Cuba is a pretty miserable place. Nevertheless, Cuba is well known for the exceptional quality of the two important public services: health and education. a. Draw and carefully label the production possibilities frontier for the Cuban Government. Briefly explain why the PPF has the shape you gave it. b. In response to a devastating natural disaster, the government now decides to make health services a priority. How might this priority be reflected on the PPF graph? Show and explain your answer. c. Is there a way for Cuba to satisfy its priority for health services without compromising its education services? Discuss. QUESTION 2. Deniz needs to decide how many CDs and DVDs to buy. A DVD costs 10 YTL

and a CD costs 5 YTL. This semester Deniz cannot spend more than 200YTL on CDs and DVDs. a. Draw and label his budget line for the semester by placing DVDs on the x-axis and CDs on the y-axis. In your graph, indicate the y- and x-intercepts and the slope of the budget line. b. With 50 YTL of the money allocated on CDs and DVDs Deniz bought a CD burner. Draw his new budget line. c. But now, for him, the cost of a CD is effectively equal to the cost of a blank CD: 2 YTL. Draw his new budget line.

BOAZ UNIVERSITY | DEPARTMENT OF ECONOMICS EC 101.04 | INTRODUCTION TO MICROECONOMICS | FALL 2011

QUESTION 3. In recent years, the urban market in Beijing is significantly affected by (1) a new cohort of migration to the city, and (2) the rising wages in the construction sector. a. Starting with an initial state of equilibrium, graph the effects of the mentioned factors on the housing market. Carefully label the initial and the final prices and quantities. What happens, when all is said and done, to the final equilibrium quantity and price of urban housing? b. To provide cheap housing for low-income immigrants, the government of China decided to impose rent controls. Graph the effect of this government intervention. What could be done to overcome the resulting housing situation? QUESTION 4. In Ireland, Guinness Corp. has raised the price of a pint beer from 5 Euros to 6 Euros. It subsequently observed a decrease in the amount of pint consumed per week from 200.000 to 190.000. a. Calculate the price elasticity of demand for this price change. Is demand in this case elastic, inelastic, or unitary elastic? (Show all your calculations. Hint: Price Elasticity of Demand is the ratio of percentage change in quantity demand to percentage change in price.) b. Discuss briefly why the price elasticity of demand for a pint of Guinness may be whatever it is in part (a) of your answer. c. Does it make sense in this example for Guinness Corp. to have raised its price? Why or why not? Explain your answer referring to the relation between total revenue and price elasticity of demand.