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# Problem 1. Teresa won the New Mexico lottery and was given the option of receiving \$22 million immediately or \$1,250,000 at the end of each year for

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Problem 1. Teresa won the New Mexico lottery and was given the option of receiving \$22 million immediately or \$1,250,000 at the end of each year for 30 years. a. If Teresa opts for the 30 annual payments, how much in total will she receive? b. What is the present value of the 30 annual payments if the interest rate is 4 percent? Based on this value, should Teresa opt for the up-front payment or the 30 installments? c. What is the present value of the 30 annual payments if the interest rate is 8 percent? Based on this value, should Teresa opt for the up-front payment or the 30 installments? Problem 3. During the last 10 years, Orlando, Florida, grew rapidly, with new jobs luring young people into the area. Despite increases in population and income growth that expanded demand for housing, the price of existing houses barely increase. Why? Illustrate your answer with supply and demand curves. Problem 5. The generalized demand and supply functions for good X are Qd = 638 – 8 P + 0.005 M – 4 P Y Qs = 300 + 3 P Where Q D = quantity demanded of good X P = price of good X M = consumer income P Y = price of good Y Q S = quantity supplied of good X P = price of good X a. Are good X and good Y substitutes or complements? How do you know? b. Is good X a normal good or an inferior good? How do you know? c. What is the demand function when M = \$15,000, P Y = \$20? d. Solve for the equilibrium price ( P o ) and the equilibrium quantity ( Q o ). e. Suppose that, on average, consumer income rises to \$20,000. Solve for the new equilibrium price ( P 1 ) and the new equilibrium quantity ( Q 1 ). Problem 6. Consider the following demand and supply functions: Demand: Q d = 80 – 4P Supply: Q s = 50 + 2P a. Solve for the equilibrium price (P o ) and the equilibrium quantity (Q o ). 1
b. Suppose there are complaints that the equilibrium price in this market is unfair and Congress sets a price control of \$7.50. Is this a price floor or a price ceiling? Explain why Congress set this price—was the equilibrium price considered too low or too high? Will this price control result in a surplus or a shortage? Of how much? Problem 7. Consider the following demand and supply functions for good X : Demand: Q d = 800 – 55P Supply: Q s = 45P - 200 a. Find the inverse demand function and the inverse supply function. b. Find the equilibrium price and quantity in this market. c. Sketch the market for good X . Problem 8. Your good friend owns a small town movie theatre. She currently charges \$5 per ticket for everyone who comes to the movies. Given the demand curves shown, answer the following questions: Adult Demand 10 20 30 40 50 60 70 80 90 100 Quantity 1 2 3 4 5 6 7 8 9 10 Price Child Demand 5 10 15 20 25 30 35 40 45 50 55 60 65 70 Quantity 1 2 3 4 5 6 7 8 9 10 Price 2
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