Initial Publication Date: April 12, 2016
Using Graphs in Economics: Practice Problems
Problem 1:
A business is considering dropping the price of its produce from $3 to $1. Based on an evaluation of some sales data, an economic consultant creates the following simple model for the business owner.
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Provenance: Peter Schuhmann, University of North Carolina-Wilmington
Reuse: This item is offered under a Creative Commons Attribution-NonCommercial-ShareAlike license http://creativecommons.org/licenses/by-nc-sa/3.0/ You may reuse this item for non-commercial purposes as long as you provide attribution and offer any derivative works under a similar license.
- What is the predicted change in quantity that will be demanded?
- What assumptions has the economist made in creating this model?
- When the price falls from $3 to $1, quantity demanded will rise from 3 to 7, a change of 4.
- The economist has drawn a linear demand curve. His model assumes quantity demanded always increases by 1 each time the price falls by $0.50. Based on the actual data, the demand curve was probably not perfectly linear --- he made this assumption so that the model would be easier to read for the business owner.
Problem 2:
An economist predicts that a country can trade off production in food for cars, based on this production possibilities graph.
Provenance: Peter Schuhmann, University of North Carolina-Wilmington
Reuse: This item is offered under a Creative Commons Attribution-NonCommercial-ShareAlike license http://creativecommons.org/licenses/by-nc-sa/3.0/ You may reuse this item for non-commercial purposes as long as you provide attribution and offer any derivative works under a similar license.
- If car production is cut back from 150 to 100, what will happen to food production?
- If car production were cut back further, to fewer than 100 units, what will happen to the ability of the country to substitute food for cars?
- When car production is reduced from 150 to 100, food production increases by 10 (from 40 to 50.)
- Since the graph is non-linear, we see diminishing returns on food production as car production is cut back. Further reductions in car production will produce smaller (than 10) increases in food production.
Problem 3:
Describe the relationship between the number of slices of pizza eaten and total satisfaction shown in the graph.
Provenance: Peter Schuhmann, University of North Carolina-Wilmington
Reuse: This item is offered under a Creative Commons Attribution-NonCommercial-ShareAlike license http://creativecommons.org/licenses/by-nc-sa/3.0/ You may reuse this item for non-commercial purposes as long as you provide attribution and offer any derivative works under a similar license.
- The graph shows an upward-sloping relationship, which means that as the number of slices of pizza eaten increases, total satisfaction also increases.
- There is a positive, or direct, relationship between these two variables.
- We also see that the relationship is non-linear. The slope gets flatter at higher numbers of slices eaten. This means that as the number of slices of pizza eaten increases, total satisfaction increases at a decreasing rate. Satisfaction goes up, but it goes up by smaller and smaller amounts as more pizza is eaten.
Problem 4:
- Describe how a change in price impacts a demand curve.
- Describe how a change in a parameter impacts a demand curve.
- A change in price, P, moves us from one point to another along a given demand curve.
- A change in a parameter will shift all of the data points for P and Q, resulting in an entirely new demand curve.
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