Transcript Problem 3.8: Draw a circular flow diagram. Identify the parts of the

Problem 2.3: Draw a circular flow
diagram. Identify the parts of the model
that correspond to the following:
Sam pays $1 for a quart of milk
 Sally earns $4.50 an hour
 Serena spends $7 to see a movie
 Stuart earns $10,000 from his 10%
ownership of Acme Industrial.

Problem 3.8 Red Sox and White Sox
a. Prices without trade
b. Absolute and comparative advantages
c. Range of prices where trade can occur
Boston
Chicago
Red Sox per Hr
3
2
White Sox per Hr
3
1
Problem 4.9 Bagels and Cream Cheese
Explain why the following might happen:

Pcream cheese up and Qbagels up.
–

This is explained by Pmilk down or Pflour
down. Ilustrate with S – D curves.
Pcream cheese up and Qbagels down.
–
This is explained by Pmilk up or Pflour up.
Illustrate with S – D curves.
Problem 4.11 Champagne fears

Champagne distributors fear that “high
price of champagne will cause demand to
drop.”
–
–
What’s wrong with what they’re saying.
Illustrate with a graph.
Problem 5.5 Rid’n’ the subway

There were 4 million fewer riders in December
1995, the first month after fares went up 25 ¢
to $1.50, than the previous December, a 4.3%
decline.
–
–
–
Estimate the price elasticity of demand for the
subway.
Will higher fare increase or decrease Transit
Authority revenue?
Why might your estimate of elasticity be
unreliable?
Problem 5.10 Wheatland floods
In the summer of 1993, floods destroyed
thousands of acres of wheat.

Farmers whose crops were destroyed were
much worse off but other farmers benefited.
Why?
 What information do you need about the
market for wheat to assess whether farmers
as a group were hurt or helped by the floods?
Problem 6.2 Cheese prices too low!?!



Show a binding price floor on cheese. How
does this effect the price of cheese and the
quantity sold?
Farmers complain that the price floor has
reduced their revenue. Is this possible? Show.
The gov’t now purchases surplus cheese at the
price floor. Who gains? Who loses?
Problem 6.3 Luxury tax

$500 tax placed on luxury cars.
– Will the price paid by consumers rise by
$500, more than $500, or less than $500?
– Illustrate