1. Pat and Kris are roommates. They spend most of their time studying 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 pizza. a. Who has absolute advantage in making pizza? Who has absolute advantage in making root beer?

b. What is the opportunity cost of making Pizza for Kris? What is the opportunity cost of making pizza for Pat?

c.What is the opportunity cost of brewing a gallon of beer for Kris? What is the opportunity cost of brewing a gallon of beer for Pat?

2. Suppose demand for some commodity is a straight line and is given by the equation: Qd = 100 – 2P. a. Draw the demand curve on a price-quantity axis (please label your axes and indicate the price and quantity intercepts).

b. Calculate the price elasticity of demand between the prices of $41 and $43. c. What price should the seller set so that total revenue is at a maximum.

3. The demand for ice cream cones is given by the equation Qd=200 – 0.25P and the supply of ice cream cones is Qs=0.5P – 100.The price is expressed in cents and the quantity is expressed in cones per day.

a. Draw the demand and supply curves on a price-quantity axis (please label your axes and indicate the price and quantity intercepts). b. Calculate the equilibrium price and quantity (by solving the equations simultaneously). Show this on the diagram. c. What is the quantity demanded and supplied in the market at price of 500 cents per cone?

4. Calculate the cross-price elasticity for the following goods. Are they substitutes or complements? (a) The price of motor vehicles goes up by 10%, causing the demand for public transportation to go up by 5%.

(b) The price of motor vehicles goes up by 10%, causing the demand for gasoline to go down by 2%. (c) The price of oranges increases by 50%, causing the demand for strawberries to go up by 5%. (d) The price of computer software falls by 25%, causing the demand for computers to increase by 1%.

(e) The price of lettuce falls by 20%, causing the demand for salad dressing to increase by 4%.