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Price Ceiling Influence: Government Intervention Impact

## Question One (25 points)

• Students are required to answer allof the following four questions in a word document.
• Students are expected to refer to the course materials and use examples from the course and from their own experience in their answers where needed.
• The total weighting of this FTHE is (50%) of the total course grade.
• You are advised to adhere to the rules and regulations as specified by AOU rules and regulations. Any form of plagiarism will be subject to AOU rules and regulations.

Demand for coffee last Monday is shown in bold [labeled D(Monday)].

Refer to the figure above. On Tuesday the news featured a story that a storm wiped out the entire coffee crop in Brazil. On Wednesday, what will happen to the demand curve of coffee? Would it shift to the left D(A) or to the right D(B)? Explain why? (8 points)

1. Assuming consumers eat either rice or pasta for dinner every night. If the price of rice increases, what will happen in the pasta market. Show the new equilibrium price and quantity.   (8 points)

2. What will happen to the demand curve for inferior good if the income of consumers decreased? Indicate the direction of new equilibrium price and quantity. (9 points)

Complete the table below based on the relationships among the various cost functions.

 Output TC TFC TVC ATC AFC AVC MC 0 \$400 1 \$120 2 \$240 3 \$840 4 \$320 5 \$240

1. Refer to the figure above. Suppose all the sellers in this market started out charging a price of \$50 per unit. What is the most likely result? (8 points)

2. Refer to the figure above. Now suppose that the government imposes a price ceiling of \$40. What will happen to equilibrium price? (8 points)

3. "As the price of personal computers continues to fall, demand increases." This sentence is inaccurate. Explain why? (9 points)

Jaafar is trying to decide how to divide his time between his job as a stocker in the local grocery store, which pays \$7/hr for as many hours as he chooses to work, and cleaning windows for the businesses in downtown. He makes \$2 for every window he cleans. Jaafar is indifferent between the two tasks, and the number of windows he can clean depends on how many hours he cleans a day, as shown in the table below:

1. Based on the information above, what is Jaafar's hourly opportunity cost of cleaning windows?

2. Based on the information above, his benefit from the first hour cleaning windows is

3. Based on the information above, the first hour Jaafar spends cleaning windows costs him _____ that he could have earned in the grocery store.

4. Based on the information above, a second hour cleaning windows will yield additional earnings of _____

5. Based on the information above, does the 3rdhour cleaning satisfy the cost-benefit principle?

6. Based on the information above, what is the smallest amount of money per window cleaned that would induce Jaafar to spend at least one hour per day cleaning?

7. Based on the information above, what are Jaafar's reservation prices for the 3rd and 4thhours of cleaning windows?

8. Based on the information above, if we plot Jaafar's reservation price per window on the vertical axis and the number of windows cleaned each day on the horizontal axis, we will have Jaafar's _______ curve of window cleaning service.