YEDITEPE UNIVERSITY-FACULTY OF COMMERCE
ECON 111 - INTRODUCTION TO ECONOMICS
HOMEWORK 1
DUE DATE: 17.03.2015
1. Indicate on the following graph of the circular flow model, the real or money flow in which the
following items belong:
a.
Donald Trump rents a Manhattan building to a hotel.
b.
Marmara University buys some Dell computers
c.
You pay your income tax.
d.
You buy your groceries.
f.
Nike pays Roger Federer for promoting its sports shoes.
2. You win $100 in a lottery. You have a choice between spending the money now or putting it
away for a year in a bank account that pays 5 percent interest. What is the opportunity cost of
spending the $100 now?
2. If you spend $100 now instead of saving it for a year and earning 5 percent interest, you are
giving up the opportunity to spend $105 a year from now.
3. Consider the markets for DVDs, TV screens, and tickets at movie theaters.
a. For each pair, identify whether they are complements or substitutes:
• DVDs and TV screens
• DVDs and movie tickets
• TV screens and movie tickets
b. Suppose a technological advance reduces the cost of manufacturing TV screens. Draw a
diagram to show what happens in the market for TV screens.
c. Draw two more diagrams to show how the change in the market for TV screens affects
the markets for DVDs and movie tickets.
3.
a. DVDs and TV screens are likely to be complements because you cannot watch a DVD without a
television. DVDs and movie tickets are likely to be substitutes because a movie can be watched at a
theater or at home. TV screens and movie tickets are likely to be substitutes for the same reason.
b. The technological improvement would reduce the cost of producing a TV screen, shifting the
supply curve to the right. The demand curve would not be affected. The result is that the equilibrium
price will fall, while the equilibrium quantity will rise.
The reduction in the price of TV screens would lead to an increase in the demand for DVDs
because TV screens and DVDs are complements. The effect of this increase in the demand for
DVDs is an increase in both the equilibrium price and quantity.
The reduction in the price of TV screens would cause a decline in the demand for movie tickets
because TV screens and movie tickets are substitute goods. The decline in the demand for movie
tickets would lead to a decline in the equilibrium price and quantity sold.
4. A price change causes the quantity demanded of a good to decrease by 30 percent, while the
total revenue of that good increases by 15 percent. Is the demand curve elastic or inelastic?
Explain.
4. As the price changes, quantity demanded decreases by 30% which means that there is a price
rise. The impact of this price rise is an increase in total revenue. If demand is elastic, a decline in
the price will increase total revenue. If demand is inelastic, an increase in the price will cause total
revenue to rise. Therefore, the demand curve is inelastic (please remember that we also solved
this problem mathematically in the classroom).