Họ và tên: Chiêm Nguyên Bảo

MSSV: BAACIU21172

ASSIGNMENT 1
CHAPTER 1
Problem 7: Explain whether each of the following government activities is motivated by a
concern about equality or a concern about efficiency. In the case of efficiency, discuss the
type of market failure involved.
a) Regulating cable TV prices
This government activity is motivated by a concern about equality, about making sure that the
price for cable TV are reasonable and affordable for consumers.
b) Providing some poor people with vouchers that can be used to buy food
This government activity is motivated by a concern about equality, as its purpose is providing
assistance to people who cannot afford to buy food.
c) Prohibiting smoking in public places
This government activity is motivated by a concern about effiency as its aim to protect the health
and safety of smokers and non-smokers and reduce healthcare costs
d) Breaking up Standard Oil (which once owned 90 percent of all oil refineries) into
several smaller companies
This government activity is motivated by a concern about efficiency, to prevent market failure of
monopolies, which can lead to higher prices, reduced output, and reduced innovation.
e) Imposing higher personal income tax rates on people with higher incomes
This government activity is motivated by a concern about equality as it aims to redistribute
wealth and reduce income inequality.
f) Instituting laws against driving while intoxicated
This government activity is motivated by a concern about efficiency as it aims to prevent
accidents, injuries and deaths caused by drunk driving, and reduce healthcare and other costs.

CHAPTER 3
Problem 2: American and Japanese workers can each produce 4 cars a year. An American
worker can produce 10 tons of grain a year, whereas a Japanese worker can produce 5 tons
of grain a year. To keep things simple, assume that each country has 100 million workers.
 a) For this situation, construct a table analogous to the table in Figure 1.
Production/worker/year Given 100m workers
Total possible production per year
Cars Grain Cars Grain
American 4 10 America 400 mil. 1 billion tons
Japanese 4 5 Japanese 400 mil. 500 mil. tons

b) Graph the production possibilities frontiers for the American and Japanese
economies.

America
450

400

350

300

250
Cars

200

150

100

50

0
0 200 400 600 800 1000 1200
Grain
 Japanese
450

400

350

300

250
Cars

200

150

100

50

0
0 100 200 300 400 500 600
Grain

c) For the United States, what is the opportunity cost of a car? Of grain? For Japan,
what is the opportunity cost of a car? Of grain? Put this information in a table
analogous to Table 1.
- The opportunity cost of a car in the United States is the amount of grain that worker
cannot produce. Because a US worker can produce either 4 cars or 10 tons of grain per
year, if they produce one more car, they cannot produce 2.5 tons of grain. And if they
produce one more ton of grain, they cannot produce 0.4 cars.
- The opportunity cost of a car in Japan is not able to produce 1.25 tons of grain. And
worker produces one more ton of grain, they cannot produce 0.8 cars.
Opportunity cost of
1 car 1 ton of grain
United States 2.5 tons of grain 0.4 cars
Japan 1.25 tons of grain 0.8 cars

d) Which country has an absolute advantage in producing cars? In producing grain?

- The United States has an absolute advantage in producing grain.
- No country has an absolute advantage in producing cars.
e) Which country has a comparative advantage in producing cars? In producing
grain?
- The United States has a comparative advantage in producing grain and Japan has a
comparative advantage in producing cars.
 - In the US, a car is twice as expensive as in Japan. However, in Japan, a ton of grain is
twice as expensive as it is in the US.
f) Without trade, half of each country’s workers produce cars and half produce grain.
What quantities of cars and grain does each country produce?
- If half the workers in each nation produce cars and half grain, Japan produces 50 million
workers x 4 cars per worker = 200 million cars and 50 million workers x 5 tons of grain
per worker = 250 million tons of grain.

- The US produces 50 million workers x 4 cars per worker = 200 million cars and 50
million workers x 10 tons of grain per worker = 500 million tons of grain.

g) Starting from a position without trade, give an example in which trade makes each
country better off.
Starting from a position without trade, the US takes 25 million workers out of car production and
puts them into grain production. → The US now produces 100 million cars and 750 million tons
of grain. And suppose Japan takes 25 million workers out of grain production and put them into
cars production. They now produce 300 million cars and 125 million tons of grain.
Problem 8: Suppose that in a year an American worker can produce 100 shirts or 20
computers and a Chinese worker can produce 100 shirts or 10 computers.
a) For each country, graph the production possibilities frontier. Suppose that without
trade the workers in each country spend half their time producing each good.
Identify this point in your graphs.

The production possibilities frontier

25

20
Computers

15

10

0
0 20 40 60 80 100 120
Shirts

American Chinese
 b) If these countries were open to trade, which country would export shirts? Give a
specific numerical example and show it on your graphs. Which country would
benefit from trade? Explain.
- For the American worker, the opportunity cost of producing one shirt is 1/20 computers,
and the opportunity cost of producing one computer is 20 shirts.
- For the Chinese worker, the opportunity cost of producing one shirt is 1/10 computers,
and the opportunity cost of producing one computer is 10 shirts.
- Comparing the opportunity costs, we can see that the American worker has a lower
opportunity cost of producing computers (20 shirts) compared to the Chinese worker (10
shirts). Therefore, the American worker has a comparative advantage in producing
computers.
➔ Based on comparative advantage, the American worker would export computers and
the Chinese worker would export shirts.
c) Explain at what price of computers (in terms of shirts) the two countries might
trade.
If the American worker gives up 20 shirts to produce 1 computer, and the Chinese worker gives
up 10 shirts to produce 1 computer, a possible trade could occur at a price of 15 shirts per
computer.
d) Suppose that China catches up with American productivity so that a Chinese
worker can produce 100 shirts or 20 computers. What pattern of trade would you
predict now? How does this advance in Chinese productivity affect the economic
well-being of the two countries’ citizens?
- If the Chinese worker's productivity increases to match the American worker's
productivity (100 shirts or 20 computers), the production possibilities for both countries
will expand.
- The PPF graphs for both countries will shift outward, allowing them to produce more of
both goods.
- In this scenario, the pattern of trade would depend on the terms of trade (the price ratio of
computers to shirts).
- If the terms of trade are more favorable for the American worker (e.g., fewer shirts per
computer), the American worker may still export computers. However, if the terms of
trade become more favorable for the Chinese worker (e.g., fewer computers per shirt), the
Chinese worker may start exporting computers.
➔ The advancement in Chinese productivity would benefit both countries' citizens. It would
lead to increased production and consumption possibilities, allowing citizens to enjoy a
wider range of goods and services. Additionally, trade between the two countries would
result in gains from specialization and exchange, further enhancing economic well-being.
CHAPTER 4
Problem 10: Because bagels and cream cheese are often eaten together, they are
complements.
a) We observe that both the equilibrium price of cream cheese and the equilibrium
quantity of bagels have risen. What could be responsible for this pattern—a fall in
the price of flour or a fall in the price of milk? Illustrate and explain your answer.
- If the price of flour falls, since flour is an ingredient in bagels, the supply curve for bagels
would shift to the right. As a result, there would be a fall in the price of bagels and a rise
in the equilibrium quantity of bagels.

- Because cream cheese is a complement to bagels, the fall in the equilibrium price of
bagels increases the demand for cream cheese. The result is a rise in both the equilibrium
price and quantity of cream cheese. → A fall in the price of flour indeed raises both the
equilibrium price of cream cheese and the equilibrium quantity of bagels.
- Because milk is an ingredient in cream cheese, the fall in the price of milk leads to an
increase in the supply of cream cheese. This leads to a decrease in the price of cream
cheese, rather than a rise in the price of cream cheese. So, a fall in the price of milk could
not have been responsible for the pattern observed
b) Suppose instead that the equilibrium price of cream cheese has risen but the
equilibrium quantity of bagels has fallen. What could be responsible for this pattern
- a rise in the price of flour or a rise in the price of milk? Illustrate and explain your
answer.
- A fall in the price of flour led to a rise in the price of cream cheese and a rise in the
equilibrium quantity of bagels. If the price of flour rose, the opposite would be true; it
would lead to a fall in the price of cream cheese and a fall in the equilibrium quantity of
bagels. Since the question says the equilibrium price of cream cheese has risen, it could
not have been caused by a rise in the price of flour.
- A fall in the price of milk caused a decline in the price of cream cheese, so a rise in the
price of milk would cause a rise in the price of cream cheese. Since bagels and cream
cheese are complements, the rise in the price of cream cheese would reduce the demand
for bagels, as figure below shows. The result is a decline in the equilibrium quantity of
bagels. So a rise in the price of milk does cause both a rise in the price of cream cheese
and a decline in the equilibrium quantity of bagels.
Problem 11: Suppose that the price of basketball tickets at your college is determined by
market forces. Currently, the demand and supply schedules are as follows:
 a) Draw the demand and supply curves. What is unusual about this supply curve?
Why might this be true?

25

20

15
Price

10

0
0 2000 4000 6000 8000 10000 12000
Quantity

Demand Supply

The supply curve is parallel to the price line because at all the different prices, the quantity
supplied is constant at 8,000 tickets. One of the possible reason is that the number of tickets
supplied by the college is constant regardless of the ticket price since the available seats are
8,000 and the college administration is ready to accept any price determined by the market.
b) What are the equilibrium price and quantity of tickets?
The equilibrium point is where the quantity demanded is equal to the quantity supplied.
→Here, the equilibrium quantity is 8,000 tickets, and the equilibrium price is $8.
c) Your college plans to increase total enrollment next year by 5,000 students. The
additional students will have the following demand schedule:
Now add the old demand schedule and the demand schedule for the new students to
calculate the new demand schedule for the entire college. What will be the new equilibrium
price and quantity?
Quantity
Price Q for old Q for new Q for all
supplied
4 10,000 4,000 14,000 8,000
8 8,000 3,000 11,000 8,000
12 6,000 2,000 8,000 8,000
16 4,000 1,000 5,000 8,000
20 2,000 0 2,000 8,000

➔ So the new equilibrium quantity is 8,000 tickets and new equilibrium price is $12.

CHAPTER 5
Problem 8: The New York Times reported (Feb. 17, 1996) that subway ridership declined
after a fare increase: “There were nearly four million fewer riders in December 1995, the
first full month after the price of a token increased 25 cents to $1.50, than in the previous
December, a 4.3 percent decline.”
a) Use these data to estimate the price elasticity of demand for subway rides.
- The percentage change in quantity is 4.3%.
- The percentage change in price:
1.5 − 1.25
∗ 100 = 20%
1.25

- Price elasticity of demand:

% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 4.3
= = 0.22
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 20
➔ Inelastic
b) According to your estimate, what happens to the Transit Authority’s revenue when
the fare rises?
Revenue will increase when fare rises because the demand is inelastic as indicated by the value
of elasticity of demand above.
c) Why might your estimate of the elasticity be unreliable?
The estimate of elasticity might be unreliable because it is only the first month after the increase
in fare. As time goes by, people may switch to other means of transport due to the increase in
fare. So, in the Long run, the elasticity might be larger than in the short run.

Problem 10: Consider public policy aimed at smoking.

a) Studies indicate that the price elasticity of demand for cigarettes is about 0.4. If a
pack of cigarettes currently costs $5 and the government wants to reduce smoking
by 20 percent, by how much should it increase the price?

If a pack of cigarettes currently costs $2 and the government wants to reduce smoking by 20
percent, then it should increase the price by 20/0.4 = 50 percent to $3.
b) If the government permanently increases the price of cigarettes, will the policy have
a larger effect on smoking 1 year from now or 5 years from now?
If the government permanently increases the price of cigarettes, then the policy will have a larger
effect on smoking five years from now, because the demand is more elastic in the long run.
c) Studies also find that teenagers have a higher price elasticity of demand than adults.
Why might this be true?
Teenagers may have a higher price elasticity of demand than do adults, because they may be less
addicted.

CHAPTER 6
Problem 8: A case study in this chapter discusses the federal minimum-wage law.
a) Suppose the minimum wage is above the equilibrium wage in the market for
unskilled labor. Using a supply-and-demand diagram of the market for unskilled
labor, show the market wage, the number of workers who are employed, and the
number of workers who are unemployed. Also show the total wage payments to
unskilled workers.
- The graph illustrates a labor market with a binding minimum wage.
- As the minimum wage set by the government is above the equilibrium wage rate it
becomes binding. Thus, the minimum wage itself is the market wage for the unskilled
labor.
- Number of workers employed: QD is the number of workers employed.
- Number of workers supplied: QS is the number of workers employed.
- Number of workers unemployed: The difference between quantity supplied and quantity
demanded (QS - QD) are the number of workers unemployed.
- Total Wage Payment:
o In the above figure, the shaded rectangle OwsQD gives the total wage paid.
o Total wage payment to unskilled workers:

= Minimum wage rate x Number of workers employed = w x QD

Thus, the total wage payment in the above figure is equal to the shaded
region OwsQD or numerically equal to (w x QD)

b) Now suppose the secretary of labor proposes an increase in the minimum wage.
What effect would this increase have on employment? Does the change in
employment depend on the elasticity of demand, the elasticity of supply, both
elasticities, or neither?
If the minimum wage is increased, it will decrease the number of employed workers. Change in
employment depends on the elasticity of demand. If the demand curve is elastic, there will be
more of a decrease in labor employed with an increase in wage rate. If the demand for labor is
inelastic, there will be less of a decrease in labor employed with an increase in wage rate.
However, the elasticity of supply does not play much role as the market is in surplus.

c) What effect would this increase in the minimum wage have on unemployment? Does
the change in unemployment depend on the elasticity of demand, the elasticity of
supply, both elasticities, or neither?

The increase in the minimum wage would further increase the unemployment. Moreover, the
size of the rise in unemployment depends on both the elasticities of supply and demand as the
elasticity of demand determines the quantity of labor demanded, and the elasticity of supply
determines the quantity of labor supplied. Indeed, the shifts in these curves depend on their
elasticity. Farther the shifts the higher will be the surplus and unemployment. Thus, the
difference between the quantity supplied and quantity demanded of labor formed due to higher
minimum wage is equal to the number of unemployed and it further depends on the elasticity’s
of both the labor supply and demand curves.
d) If the demand for unskilled labor were inelastic, would the proposed increase in the
minimum wage raise or lower total wage payments to unskilled workers? Would
your answer change if the demand for unskilled labor were elastic?

- If the demand for unskilled labor were inelastic: Due to inelastic demand, the
percentage decline in the quantity demanded of the labor or employment would be lower
than the percentage increase in the wage rate. Therefore, the total wage payments
increase to the unskilled labor.
- If the demand for unskilled labor were elastic: On the other hand, if the labor demand
is elastic, the percentage decline in the quantity demanded of the labor or employment
would be higher than the percentage increase in the wage rate. Therefore, the total wage
payments to the unskilled labor would decline.

Problem 10: A market is described by the following supply and demand curves:

𝑸𝑺 = 𝟐𝑷

𝑸𝑫 = 𝟑𝟎𝟎 − 𝑷

a) Solve for the equilibrium price and quantity.

In equilibrium: 𝑄 𝑆 = 𝑄 𝐷

↔ 2𝑃 = 300 − 𝑃

↔ 3𝑃 = 300 ↔ 𝑃 = 100
 ➔ The equilibrium price is $100

𝑄 𝑆 = 𝑄 = 2𝑃 = 2 ∗ 100 = 200

➔ The equilibrium quantity is $200

b) If the government imposes a price ceiling of $90, does a shortage or surplus (or
neither) develop? What are the price, quantity supplied, quantity demanded, and
size of the shortage or surplus?

If the price ceiling of $90 is imposed, which is less than the price is $100, then there will be a
price binding. → The market price is $90.

𝑄 𝑆 = 2𝑃 = 2 ∗ 90 = 180

→ The quantity supply is 180

𝑄 𝐷 = 300 − 𝑃 = 300 − 90 = 210

→ The quantity demand is 210

The demand is greater than the supply, so shortage occurs.

The shortage = 𝑄 𝐷 − 𝑄 𝑆 = 210 − 180 = 30

c) If the government imposes a price floor of $90, does a shortage or surplus (or
neither) develop? What are the price, quantity supplied, quantity demanded, and
size of the shortage or surplus?

If the price floor of $90 is imposed, which is less than the price is $100, then there will be a non-
price binding. → The market price is $100.

𝑄 𝑆 = 2𝑃 = 2 ∗ 100 = 200

𝑄 𝐷 = 300 − 𝑃 = 300 − 100 = 200

→ The quantity demanded is equal to quantity supplied and = 200. Thus, there is neither
shortage nor surplus.

d) Instead of a price control, the government levies a tax on producers of $30. As a

result, the new supply curve is: QS = 2(P − 30). Does a shortage or surplus (or
neither) develop? What are the price, quantity supplied, quantity demanded, and
size of the shortage or surplus?

𝑸𝑺 = 𝑸𝑫 = 𝟐(𝑷 − 𝟑𝟎) = 𝟑𝟎𝟎 − 𝑷

 ↔ 𝟑𝑷 = 𝟑𝟔𝟎 ↔ 𝑷 = 𝟏𝟐𝟎

→ The price is $120.

𝑄 𝐷 = 𝑄 = 300 − 𝑃 = 300 − 120 = 180

→ The quantity is 180

Because the quantity demand is equal to quantity supply and = 180. → There is neither shortage
nor surplus.

CHAPTER 7

Problem 9: One of the largest changes in the economy over the past several decades is that
technological advances have reduced the cost of making computers.

a) Draw a supply-and-demand diagram to show what happened to price, quantity,

consumer surplus, and producer surplus in the market for computers.

With an improvement in technology, supply increases, leading to a fall in price (from B to C)

and an increase in quantity (from Q to Q’). The consumer surplus increases (from ABE to
ACE’) and the producer surplus falls (from DBE to FCE’).
 b) Forty years ago, students used typewriters to prepare papers for their classes; today
they use computers. Does that make computers and typewriters complements or
substitutes? Use a supply-and-demand diagram to show what happened to price,
quantity, consumer surplus, and producer surplus in the market for typewriters.
Should typewriter producers have been happy or sad about the technological
advance in computers?

With a fall in demand, price falls (from B to C) and quantity falls (from Q to Q’). The consumer
surplus decreases (from ABE to FCE’) and producer surplus decreases (from DBE to
DCE’)

Typewriter producers should be sad about the technological advancement in computers, as it

would further lead to students demand more of computers and even less of typewriters.

c) Are computers and software complements or substitutes? Draw a supply-and-

demand diagram to show what happened to price, quantity, consumer surplus, and
producer surplus in the market for software. Should software producers have been
happy or sad about the technological advance in computers?

Since computers are only used and operated with the help of its supporting software, they are
complement goods (as they are not cosumed together).

With an improvement in technology used in computers, the demand for software will also
increase, shifting its demand curve to the right.
With a rise in demand, price increases (from C to B) and quantity falls (from Q to Q’). Consumer
surplus increases (from FCE to ABE’) and producer surplus increases (from DCE to
DBE’)

Software producers should be happy about the technological advancement in computers, as it

would further lead to students demand more of computers and therefore even more of software.

d) Does this analysis help explain why software producer Bill Gates is one of the
world’s richest people?

Yes, the above analysis proves that with an improvement in technology, demand for softwares
increases. Since, in the recent times computer technology has improved dramatically, the
demand for improved softwares has also increased, thus increasing the sales of software
companies.

Problem 10: A friend of yours is considering two cell phone service providers. Provider A
charges $120 per month for the service regardless of the number of phone calls made.
Provider B does not have a fixed service fee but instead charges $1 per minute for calls.
Your friend’s monthly demand for minutes of calling is given by the equation QD 5 150 2
50P, where P is the price of a minute

a) With each provider, what is the cost to your friend of an extra minute on the phone?

- The cost of Provider A’s service is fixed at $120 per month. The total cost does not
depend upon the number of phone calls. Hence the cost of one extra minute on the phone
or the marginal cost (MC) is zero for provider A.
 - For provider B, the per minute price of calls is $1.
→Therefore, the cost of one extra minute of phone call from provider B is $1.
b) In light of your answer to (a), how many minutes with each provider would your
friend talk on the phone?
Friend’s monthly demand for minutes of calling: 𝑄𝐷 = 150 − 50𝑃

At price $1 per minute, the number of minutes with Provider B that friend can enjoy is:

𝑄 = 150 − 50 ∗ 1 = 100 𝑚𝑖𝑛𝑢𝑡𝑒𝑠

From provider A, the price of one extra minute of phone call is zero.
𝑄 = 150 − 50 ∗ 0 = 150 𝑚𝑖𝑛𝑢𝑡𝑒𝑠

c) How much would she end up paying each provider every month?
The total monthly cost of the service of Provider A is $120.
Provider B charges $1 per minute of phone calls. The quantity demanded is 100 minutes at this
price.
Hence, total monthly spending for services of Provider B = $1 x 100 = $100.
d) How much consumer surplus would she obtain with each provider?
The blue curve represents the demand curve, and the red line is the price line with respect to the
price charged by provider B.
Call O(0,0); A(0,1); B(0,3); C(100,1); D(150,0)
The consumer surplus from the provider A:
𝐶𝑆𝐴 = 𝑆∆𝑂𝐵𝐷 − 𝐸𝑛𝑡𝑟𝑦 𝑓𝑒𝑒
1
= ( ∗ 3 ∗ 150) − 120 = $105
2
The consumer surplus from the provider B:
1 1
𝐶𝑆𝐵 = 𝑆∆𝐴𝐵𝐶 = ∗ 𝐴𝐵 ∗ 𝐵𝐶 = ∗ 2 ∗ 100 = $100
2 2
e) Which provider would you recommend that your friend choose? Why?
The friend gets a higher consumer surplus from provider A.
→ Therefore, Provider A is recommended.