1.

The demand for yak butter is given by 120 4pd and the supply is 2ps 30, where pd is the price paid by demanders and ps is the price received by suppliers, measured in dollars per hundred pounds. Quantities demanded and supplied are measured in hundred-pound units. (a)On the axes, draw the demand curve (with blue ink) and the supply curve (with red ink) for yak butter. (b)Write down the equation that you would solve to nd the equilibrium price. (c)What is the equilibrium price of yak butter? What is the equilibrium quantity? Locate the equilibrium price and quantity on the graph, and label them p1andq1. (d)A terrible drought strikes the central Ohio steppes, traditional homeland of the yaks. The supply schedule shifts to 2ps 60. The demand schedule remains as before. Draw the new supply schedule. Write down the equation that you would solve to nd the new equilibrium price of yak butter. (e)The new equilibrium price is --------------and the quantity is -------------------------------. Locate the new equilibrium price and quantity on the graph and label them p2 and q2. (f)The government decides to relieve stricken yak butter consumers and producers by paying a subsidy of $5 per hundred pounds of yak butter to producers. If pd is the price paid by demanders for yak butter, what is the total amount received by producers for each unit they produce? When the price paid by consumers is pd, how much yak butter is produced? (g)Write down an equation that can be solved for the equilibrium price paid by consumers, given the subsidy program. What are the equilibrium price paid by consumers and the equilibrium quantity of yak butter now? (h)Suppose the government had paid the subsidy to consumers rather than producers. What would be the equilibrium net price paid by consumers? The equilibrium quantity would be -------------. 2. Here are the supply and demand equations for throstles, where p is the price in dollars: D(p) = 40 p S(p) = 10 + p.

On the axes, draw the demand and supply curves for throstles, using blue ink.

(a)The equilibrium price of throstles is ----------------------and the equilibrium quantity is ---------------------------(b)Suppose that the government decides to restrict the industry to selling only 20 throstles. At what price would 20 throstles be demanded? How many throstles would suppliers supply at that price? At what price would the suppliers supply only 20 units? (c)The government wants to make sure that only 20 throstles are bought, but it doesnt want the rms in the industry to receive more than the minimum price that it would take to have them supply 20 throstles. One way to do this is for the government to issue 20 ration coupons. Then in order to buy a throstle, a consumer would need to present a ration coupon along with the necessary amount of money to pay for the good. If the ration coupons were freely bought and sold on the open market, what would be the equilibrium price of these coupons? (d)On the graph above, shade in the area that represents the deadweight loss from restricting the supply of throstles to 20. How much is this expressed in dollars? (Hint: What is the formula for the area of a triangle?)

3. The demand curve for ski lessons is given by D(pD ) = 1002pD and the supply curve is given by S(pS ) = 3pS . (a)What is the equilibrium price? What is the equilibrium quantity?. (b)A tax of $10 per ski lesson is imposed on consumers. Write an equation that relates the price paid by demanders to the price received by suppliers. Write an equation that states that supply equals demand. (c)Solve these two equations for the two unknowns pS and pD . With

the $10 tax, the equilibrium price pD paid by consumers would be ---------------per lesson. The total number of lessons given would be---------------------------.

(d)A senator from a mountainous state suggests that although ski lesson consumers are rich and deserve to be taxed, ski instructors are poor and deserve a subsidy. He proposes a $6 subsidy on production while maintaining the $10 tax on consumption of ski lessons. Would this policy have any di erent e ects for suppliers or for demanders than a tax of $4 per lesson? 4. A Los Angeles rm uses a single input to produce a recreational commodity according to a production function f (x) = 4x, where x is the number of units of input. The commodity sells for $100 per unit. The input costs $50 per unit. (a)Write down a function that states the rms prot as a function of the amount of input . (b)What is the prot-maximizing amount of input? What is the prot-maximizing amount of output? How much prots does it make when it maximizes prots? (c)Suppose that the rm is taxed $20 per unit of its output and the price of its input is subsidized by $10. What is its new input level? What is its new output level?16. How much prot does it make now? (Hint: A good way to solve this is to write an expression for the rms prot as a function of its input and solve for the prot-maximizing amount of input.) (d)Suppose that instead of these taxes and subsidies, the rm is taxed at 50% of its prots. Write down its after-tax prots as a function of the amount of input. What is the prot-maximizing amount of output? How much prot does it make after taxes?

5. A prot-maximizing rm produces one output, y, and uses one input, x, to produce it. The price per unit of the factor is denoted by w and the price of the output is denoted by p. You observe the rms behavior over three periods and nd the following:

period 1 2 3

y 1 2.5 4

x 1 3 8

w 1 0.5 2.5

p 1 1 1

(a)Write an equation that gives the rms prots, , as a function of the amount of input x it uses, the amount of outputy it produces, the per-unit cost of the input w, and the price of output p. (b)In a diagram , draw an isoprot line for each of the three periods, showing combinations of input and output that would yield the same prots that period as the combination actually chosen. What are the equations for these three lines? 6. Brother Jed takes heathens and reforms them into righteous individuals. There are two inputs needed in this process: heathens (who are widely available) and preaching. The production function has the following form: rp= min{h, p}, where rp is the number of righteous persons produced,h is the number of heathens who attend Jeds sermons, and p is the number of hours of preaching. For every person converted, Jed receives a payment of s from the grateful convert. Sad to say, heathens do not ock to Jeds sermons of their own accord. Jed must o er heathens a payment of w to attract them to his sermons. Suppose the amount of preaching is xed at and that Jed is a prot-maximizer. p (a)If h < , what is the marginal product of heathens? p What is the value of the marginal product of an additional heathen? (b)If h > , what is the marginal product of heathens? p What is the value of the marginal product of an additional heathen in this case? (c)Sketch the shape of this production function in the graph. Label the axes, and indicate the amount of the input where h = p.

(d)If w < s , how many heathens will be converted? If w > s , how many heathens will be converted? 7. A rm has two variable factors and a production function, f(x1, x 2) = x11/2 x21/4 The price of its output is p. Factor 1 receives a wage of w1 and factor 2 receives a wage of w2.
(a) (b) (c) (d) (e)

Derive ordinary input demand functions for x1 and x 2 Derive the output supply function Find the optimum profit Now use Hotellings lemma to check the whether the input demand functions and the output supply functions are correct. If output price is 4 and the wage of factor 1 is 2, and the wage of factor 2 is 1, how many units of factor 1 will the rm demand? How many units of factor 2 will it demand? How much output will it produce? How much prot will it make?

8. A firm has the following production function, Y=(ax1+bx2)1/2 (a) What are the conditional factor demand functions? (b) Find the cost function (c) Use Shephards Lemma to check whether the conditional factor demand functions in (a) are correct? (d) Find the output supply function and the maximum profit.

_--------------------------------------------------------------------------------Note: The problems are extracted from Varian