ECON 2001 Midterm: ECON 2001 Pitt Exam 2 2011
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Consider a small town with only three families, the Johnson family, the Marshall family, and the Walker family. The town does not currently have any streetlights, so it is very dark at night. The three families are considering putting in streetlights on Main Street and are trying to determine how many lights to install. The table below shows each family's willingness to pay for each streetlight.
Number of Streetlights | The Johnson Family | The Marshall Family | The Walker Family |
1 | $170 | $240 | $210 |
2 | 130 | 190 | 200 |
3 | 80 | 130 | 170 |
4 | 20 | 65 | 120 |
5 | 0 | 25 | 50 |
6 | 0 | 0 | 10 |
Suppose the cost to install each streetlight is $450, and the families have agreed to split the cost of installing the streetlights equally. To maximize their own surplus, how many streetlights would the Walker's like the town to install?
A. 1 streetlight
B. 2 streetlights
C. 0 streetlights
D. 3 streetlights
Table 11-2
Consider a small town with only three families, the Greene family, the Brown family, and the Black family. The town does not currently have any streetlights, so it is very dark at night. The three families are considering putting in streetlights on Main Street and are trying to determine how many lights to install. The table below shows each family's willingness to pay for each streetlight.
Number of |
The Greene Family |
The Brown Family |
The Black Family |
1 |
$340 |
$480 |
$420 |
2 |
260 |
380 |
400 |
3 |
160 |
260 |
340 |
4 |
40 |
130 |
240 |
5 |
0 |
50 |
100 |
6 |
0 |
0 |
20 |
A. Suppose the cost to install each streetlight is $360. How many streetlights should the town install to maximize total surplus from the streetlights?
(a) 3 streetlights
(b) 1 streetlight
(c) 2 streetlights
(d) 4 streetlights
B. Suppose the cost to install each streetlight is $900, and the families have agreed to split the cost of the streetlights equally. If the families vote to determine the number of streetlights to install, basing their decision solely on their own willingness to pay (and trying to maximize their own surplus), what is the greatest number of streetlights for which the majority of families would vote yes?
(a) 2 streetlights
(b) 1 streetlight
(c) 4 streetlights
(d) 3 streetlights
Topic: Circular Flow Model; Law of Demand
1. Discuss, in detail, the Circular Flow Model (i.e., how it works). Be sure to include in your analysis an overview of the markets involved.
2. Below is the demand schedule for single-family homes.
PRICE OF SINGLE-FAMILY HOMES | QUANTITY OF SINGLE-FAMILY HOMES PURCHASED |
---|---|
(in thousands) | (in thousands) |
200 | 10 |
180 | 20 |
160 | 30 |
140 | 40 |
120 | 50 |
100 | 60 |
Using the schedule above, draw the demand curve for single-family homes. Make sure to label your diagram.
Note: You will use this demand curve to answer questions 3 through 6 below.
3. Demonstrate, AND EXPLAIN, how an increase in the price of single-family homes from $120,000 to $180,000 will impact the demand for single-family homes.
4. Demonstrate, and explain, how an increase in incomes will impact the demand for single-family homes.
5. Consumers anticipate that mortgage interest rates will increase 25% within the next 18 months. Demonstrate, and explain, how this will impact the current demand for single-family homes.
6. Consumers decide that renting is a poor investment. (LIFE LESSON: Being a homeowner actually sucksâbut they do not know this yet.)
(a) Demonstrate, and explain, how this will impact the demand for single-family homes.
(b) Demonstrate, AND EXPLAIN, how this will impact the demand for hardwood flooring. HINT: Donât use your demand curve from question 2.