1. You were planning to spend Saturday working at your part-time job, but a friend asks you to go skiing. What is the true cost of going skiing? Now suppose you had been planning to spend the day studying at the library What is the cost of going skiing in this case? Explain.
2. Pat and Kris are roommates. They spend most of their time studying (of course), but they leave some time for their favorite activities: making pizza and brewing root beer. Pat takes 4 hours to brew a gallon of root beer and 2 hours to make a pizza. Kris takes 6 hours to brew a gallon of root beer and 4 hours to make a pizza. ‘’
a. What is each roommate’s opportunity cost of making a pizza? Who has the absolute advantage in making pizza? Who has the comparative advantage in making pizza?
b. If Pat and Kris trade foods with each other, who will trade away pizza in exchange for root beer?
c. The price of pizza can be expressed in terms of gallons of root beet What is the highest price at which pizza can be traded that would make both roommates better off? What is the lowest price? Explain.
3. Maria has decided always to spend one-third of her income on clothing.
a. What is her income elasticity of clothing demand?
b. What is her price elasticity of clothing demand?
c. If Maria’s tastes change and she decides to spend only one-fourth of her income on clothing, how does her demand curve change? What is her income elasticity and price elasticity now?
4. What happens to consumer and producer surplus when the sale of a good is taxed? How does the change in consumer and producer surplus com-pare to the tax revenue? Explain.
5. You are thinking about setting up a lemonade stand. The stand itself costs $200. The ingredients for each cup of lemonade cost $0.50.
a. What is your fixed cost of doing business? What is your variable cost per cup?
b. Construct a table showing your total cost, average total cost, and marginal cost for out-put levels varying from 0 to 10 gallons. (Hint: There are 16 cups in a gallon.) Draw the three cost curves.