ECON 356

Homework Assignment One

Due Tuesday, Sept. 14

Directions:  Copy and paste this into a word document and then type your answers.  Graphs do not have to be typed.

(36 pts.)

Draw a supply and demand graph for each question (1-4).  Assume ceteris paribus unless otherwise noted.  Make sure you label your axes correctly -- for example you should have the P of grapefruit and the Q of grapefruit on the axes for question #1.

1.  Assume grapefruit and oranges are substitutes.  What will happen to the market clearing price of grapefruit if the price of oranges decreases? (3 pts.)

2.  Assume that muffins and cupcakes are substitutes in production.  What will happen to the market clearing price of cupcakes if the price of muffins decreases?  (3 pts.)

3.  Assume there is an effective price floor put on the market for corn.  If corn and corn syrup are complements in production, what will happen to the market clearing price for corn syrup?  Draw two graphs here - one for corn and one for corn syrup.  HINT:  Assume that the government will buy any surplus in the corn market at the price floor price. (6 pts.)

4.  You will draw two graphs for this question.  First,  draw the market for chips and clearly shade in the consumer surplus. Then, assuming that chips and salsa are complements and the price of salsa decreases -- on a new graph show what will happen in the chip market and shade in the NEW area of consumer surplus.  (6 pts.)

5.  In the Callahan reading, he talks about how GDP, for example, is not a measurement of "wealth" since wealth is defined by individuals in different ways.  However, he goes on to say that "economic data and statistics are not useless."  How can (should) they be used, according to Callahan?  Use your own words to explain - don't simply quote the article.  (4 pts.)

6.  You have to go on a business trip.  You must rent a car for $40 per day.  Your boss has given you a budget of $360 for the entire trip.

a.  Draw your budget constraint using a composite good on one axis and car rental on the other.  Assume the composite good's price is $1.00.  Show all numbers on  your graph. (2 pts.)

b.  Find your "best affordable bundle" if your travel preferences are such that you require exactly $140 worth of other goods (composite good) for each day of rental car consumption.  Label this point on your budget constraint - Make sure you show all numbers -- amount of each good you will consume. (4 pts.)

c.  Now assume your boss has decided that he is going to increase your budget by $200.

    1. Show this change graphically (so you should show both the old and new budget constraints on the same graph) - show all numbers. (4 pts.)

    2. If your preferences change regarding other goods and you now want $100 worth of other goods (composite good) for each day of rental car consumption, what would be your "best affordable bundle" now?  Show graphically with all numbers. (4 pts.)