1) A U.S. Department of Agriculture study of the demand for food products showed that the price elasticity of demand for potatoes is -0.42; the elasticity of demand for potatoes with respect to the price of tomatoes is 0.09; and the income elasticity of demand for potatoes is 0.10.

a. If consumer incomes rise by 10%, by what percentage will the quantity of potatoes demanded change? Will it rise or fall? Show your work.


b. If consumer incomes rise by 10% (as in the last question), would the share of consumer income spent on potatoes rise, or would it fall? Calculate an estimate of the percentage change in the share of income spent on potatoes as a result of a 10% increase in income. Explain your reasoning.

c. Based on the figures above, are potatoes and tomatoes complements, or are they substitutes? Why? Explain your reasoning.


d. If the price of tomatoes rises by 10%, by what by what percentage will the quantity of potatoes demanded change? Will it rise or fall? Show your work.


e. Suppose you’re working as an economist with the Idaho Potato Growers Institute, and your boss asks you to predict the future growth rate of potato sales. You estimate that consumer’s incomes will grow at a rate of 2% per year in the future, and that the price of potatoes will fall by 1% per year. By what percentage do you estimate that the sales of potatoes will change each year in the future? Will it rise or fall? Show your work.

Sketch a graph of the demand for potatoes to illustrate the one yr change in sales of potatoes based on part (e)

5. What are the limitations of the mainstream model of consumer behavior?

2. How does a pure monopolist maximize profits? Explain clearly, with reference to a graph showing the firm's output and pricing decisions

1. A firm in perfect competition competes by lowering its price to sell more. Explain clearly why you agree or disagree with this statement.

Problem 1.1: Making Sense of the Trade Deficit

a) Explain the difference between the current account and the capital and financial account in the balance of payments.

b) What is a trade deficit?

c) Assume a U.S. firm buys (imports) $5 million (in U.S. dollars) of foreign goods. That transaction by itself increases the trade deficit by $5 million. But, the $5 million will flow back to the United States to purchase either (i) U.S. goods and services or (ii) U.S. assets.

1. How does the way the $5 million comes back to the United States determine whether there will be balanced trade or a trade deficit?
2. How does the U.S. economy benefit from either transaction (the foreign purchase of U.S. goods and services [exports] or the purchase of U.S. assets)?

d) How does the “global savings glut” help explain the trade deficit?

e) Write a short "elevator conversation" in which you explain clearly to less informed people (on the elevator, in a few minutes) what a "trade deficit" really is.

Government spending unnecessarily affects us all as taxpayers. Do you agree? why?

Explain why the firm in an monopolistic competition does not produce where marginal cost crosses demand (that is where a competitive firm would be located) but rather further up demand onto the elastic segment of the demand curve. Note again that the ability of a firm to raise price above the competitive price is termed "Market Power."

Let the IS and LM relations be given as in class but suppose that investment is now increasing in the interest rate i; that is, when i increases, I(Y,i) increases. All other functions and relations remain the same.

1. (a) Graphically derive the IS curve using a Keynesian cross; explain why, given the unusual assumption for investment, it is upward sloping.

2. (b) Draw an arbitrary LM curve (based on standard assumptions about the financial market) along with your IS curve from (a). Make your LM curve flatter than your IS curve. Suppose the government increases G. Show the impact this has on Y and i in the short run equilibrium.

Write a short essay based on current states of the US economy. Use one paragraph describing Fed's action, use one paragraph describing fiscal policy, and use at least one additional paragraph commenting on the potential effects of these policies using AS/AD framework

On what grounds have Marxists predicted the inevitable collapse of capitalism? In your answer, use concepts of “historical materialism”, “economic class”, “alienation” and “proletarian revolution”

2. The cane industry is composed of a large number of identical rms. Each rm faces the following short-run total cost (SRTC) function: SRTC = 10 + 20q + 0.5q² where q is the output canes per day. (a) Find the short-run supply curve for each cane maker. (b) If the price of a cane is 30 TL, will the rm make a loss, a prot, or neither? At this price, calculate the output, average cost, marginal revenue, and prot/loss of the rm, and show on a properly-labeled graph.

which of the following explains why syndicate units charge higher prices and make higher sales than franchised units?

a. government regulation

b. different chains operating in markets in different characteristics

c. syndication deal is the most suitable way to operate business

d. some chains may have lower quality than others

e. any of these reasons

• What can cause a financial panic?

• What would be the benefits and costs of using the Federal Reserve as a "lender of last resort"?

A bank has issued a one- year certificate of deposit for $50 million at an interest rate of 2 percent. With the proceeds, the bank has purchased a two- year Treasury note that pays 4 percent interest. a) What is the Bank's asset? b) What is the Bank's liability? c) What risk does the bank face in entering into these transactions? d) What would happen if all interest rates were to rise by 1 percent? Will the bank earn or lose money?