1. (20 points) Suppose a consumer only consumes two goods. There is a price drop of good 1 and
the quantity demanded of good 1 increased from 5 unit to 20 unit, the substitution effect is 10
unit. Use a graph to show the income effect and substitution effect for these two goods. Label the
direction of substitution effect and income effect and calculate income effect.
2. (20 points) If an analyst imputes marginal willingness to pay (demand) for green food to be
equal to: P = 245 1.5Q, what is the change in consumer surplus associated with an increase in Q
from 60 to 70 units?
3. (20 points) Assume the supply function of producing butter is P = 45 + 2QS. How much is the
producer surplus if the market price of butter is $60/unit? Please calculate producer surplus and
indicate it in a graph.
4. (40 points) The following equations represent the demand function and the supply function in
the market for honey:
P = 60- 4Q
P = 6Q
(1) Solve for the market equilibrium output (quantity) and price. Use a graph to illustrate supply
and demand curves and market equilibrium.
(2) If the government imposes a price ceiling at $24, calculate the shortage in the quantity for
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