Problem Set #1
Erika Fam Minli G18
1a.
Accounting Profit: $7000 - $1000 = $6000.
Economic Profit: $7000 - ($1000 + $6000) = 0.
Accounting profit includes Neo’s difference in total revenue and explicit costs while his
economic profit is the difference in total revenue and implicit (opportunity cost) and explicit
cost.
1b. The accounting profit would remain the same at $6000 as total revenue and explicit
costs are unchanged. However since total implicit costs (due to decrease in salary)
decreased from $6500 to $5500, Neo’s economic profit will be now $500.
1c) No as the change in the salary does not decrease his accounting profit, thus it should not
affect his employment decision.
2a. By talking about her favourite makeup line, this would increase the traction for the
makeup and thereby increase the demand. As such, the demand curve will make a
rightwared shift.
2b. As there is a decrease in price, there will not be a shift in the demand curve but there
will be a downward movement along the demand curve
2c. Due to the tensions towards a predicted rise in price, demand for oil in the present will
increase sharply, leading to a sharp increase in the demand curve for oil.
3a. With the increase in price of land, less developers will choose to develop in that area and
supply will decrease, leading to a leftward shift of the supply curve
3b. With a decrease in cement prices, overall cost of production for new houses will fall,
leading to developers developing more new houses. Thereby this increases the supply of
new houses and a rightward shift in the supply curve.
3c. Due to technological advancement there is lesser needed materials and manpower
needed to build new houses (capital). Therefore developers will find that there will be an
increase in profit by selling more new houses, leading to the increase of supply, thereby
shifting the supply curve to the right.
3d. Subsidies by the government will lower the cost of production. Hence suppliers will be
incentivized to develop more new houses, therefore increasing the supply and shifting the
curve to the right.
4a. The most that the quantity demanded for coffee can fall is less than 20% as any change
in price will lead to a less than proportionate change in quantity demand due to its inelastic
demand
4b. When the price of coffee increases by 20%, the quantity demanded for bagels
decreases. As such coffee and bagels are most likely complements of each other
Problem Set #1
Erika Fam Minli G18
4c. Starbucks coffee would be less elastic than normal coffee. As starbucks coffee has little
to no alternatives and has a strong brand value. As such, any change in price will lead to a
less than proportionate change in quantity demanded for Starbucks coffee. On the other
hand, normal coffee can be found at many cafes, coffee shops and consumers can choose to
drink tea or chocolate as well. Therefore the provision of alternatives allows the change in
price will lead to a more than proportionate change in the quantity demanded.
5.
6a.
6b.
Problem Set #1
Erika Fam Minli G18
6c.
6d.
6e.
7a. At price P2, there will be Q2 opera tickets sold
7b. Empty seats: Q3-Q2
7c. Consumer surplus before price change: A+B+D
Consumer surplus after price change: A
7d. Producer surplus before price change: C+E
Producer surplus after price change: B+C
7e. Change in total surplus: (A+B+C+D+E) – (A+B+C) = D+E