DEPARTMENT OF ECONOMICS

COLORADO STATE UNIVERSITY

EC 102: PRINCIPLES OF MICROECONOMICSProblem Set 1

1. Determinants of Demand and Supply (1 point each)

For each of the following draw a demand curve and a supply curve for the product in question (on one diagram) and the shift the appropriate curve on the basis of the information given, and explain your answer To receive credit you must label your axes and your curves.

i. Consider the market for Volvos. Suppose that the latest crash test results are publicized and Volvos rate # 1 for safety.

ii. Consider the market for cordless telephones. Suppose a technological improvement in production occurs.

iii. Consider the market for Nick-n-Willy's pizza. Suppose Cozzola's drop the prices of their pizzas.

iv. Consider the market for non-organic milk. Suppose research reveals that the presence of bovine growth hormones in non-organic milk increases people's likelihood of getting certain cancers.

v. Consider the market for season tickets to CSU women's basketball games this season. Suppose the team made it to the NCAA championships last season.

vi. Consider the market for corn chips. Suppose the price of salsa falls.

vii. Consider the market for Nike sneakers. Suppose news reports of terrible working conditions in Nike plants in Indonesia are released.

viii. Consider the market for solar heating in Colorado. Suppose the state government provides firms that produce solar heating systems with subsidies.

ix. Consider the market for the herbal cold remedy Echinacea. Suppose it is a particularly long and harsh winter.

x. Consider the market for hiking boots. Suppose there is an increase in the price of one of the materials used to produce the boots.

2. Determinants of Equilibrium Price and Quantity (2 points each)

For each of the following draw a supply and demand diagram and show what happens to equilibrium price and quantity on the basis of the information given, and explain your answer. To receive credit you must label your axes and your curves and you must label the equilibrium prices and quantities.

i. Consider the market for fresh cut flowers. What happens around Mother's Day?

ii. Consider the market for cigarettes. What happens now that people have to show ID to purchase cigarettes?

iii. Consider the market for soy bean products. What happens when research reports on the health benefits of eating soy products are released and at the same time the government provides soy producers with subsidies?

iv. Consider the market for movie rentals. What happens when the price of VCRs falls and there is a technological improvement in the production of video tapes?

v. Consider the market for glass containers. What happens if the government decides to increase taxes on the production of plastic containers?

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3. Multiple Choice (1 point each)

i. Factor markets are markets in which

a. Households are the buyers and firms are the sellers.

b. Households are the sellers and firms are the buyers.

c. Land, labor and capital services are exchanged for income.

d. Both b and c.

ii. If the theory of demand hypothesizes that an increase in the price of a good (P) will result in a decrease in the quantity demanded (Qd) of that good then

a. Qd is the exogenous variable and P is the endogenous variable.

b. Qd is the endogenous variable and P is the exogenous variable.

c. Qd and P are both exogenous variables.

d. Qd and P are both endogenous variables.

iii. Which of the following will not shift the PPF outward?

a. A new discovery of oil.

b. A technological improvement in production.

c. A decrease in unemployment.

d. A natural disaster that destroys land and capital.

iv. A practice where sons and daughters choose to enter into the same work as their fathers and mothers, would be most characteristic of

a. a traditional economic system.

b. a command economic system.

c. a market economic system.

d. none of the above.

v. If a surplus exists in a market, without government intervention,

a. the price will rise to the equilibrium level.

b. The price will remain where it is indefinitely.

c. The price will fall to the equilibrium level.

d. The price will have to be brought to the equilibrium level by the government.