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 milkSally earns $4.50 an hourSerena spends $7 to see a movieStuart earns $10,000 from his 10%

ownership of Acme Industrial.

Problem 3.8 Red Sox and White Soxa. Prices without tradeb. Absolute and comparative advantagesc. Range of prices where trade can occur

Red Sox per Hr White Sox per Hr

Boston

Chicago

3

2

3

1

Problem 4.9 Bagels and Cream CheeseExplain 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