label the graphs. You can work in groups but each student should turn in a hard copy of his own
problem set.

1. A university produces two commodities: research and teaching. The resources the university
uses include faculty and staff, libraries, classrooms, and so on. The following schedule indicates
some points on the university’s PPF:
Research
Teaching A
900
0 B
750
20 C
600
45 D
450
75 E
300
110 F
150
150 G
0
200 a) Does teaching production by the university exhibit increasing, constant or decreasing per
unit opportunity costs? Explain. (5p)
b) Graph the university’s PPF. (5p)
c) Suppose that the university is producing at combination C but would like to alter production
to D. What would be the per-teaching unit opportunity cost of producing the extra teaching
units? (5p)
d) Assume that the laboratory (that was only used to produce research) is destroyed in a fire.
Show how this would impact in the PPF. (5p)
e) Assume that the university president proposed to move the university back to point C from
point D because the total amount of output produced is greater (600 + 45 = 645 vs 450 + 75
= 525). Economically speaking, is this the right movement? (5p) 2. Assume that the demand curve for certain drug in Puerto Rico can be represented by this
relation: Qd= 140-20*P where Qd is the quantity measured in dose, P is the price per unit.
Additionally assume that the market price is equal to $3 dose.
a) Draw the demand curve and find the equilibrium quantity for the given price? (5p)
b) What is the amount of the consumer surplus, in billion dollars, at the market price? What
are the total expenditures? (5p)
c) Assume that the government subsidies the price, $1 for each dose consumed. Estimate the
change in the consumer surplus. (5p)
d) Estimate the cost of the subsidy to the government and the deadweight loss. (5p)
e) Estimate the price elasticity of demand for this drug given this change in price (5p) 3. Assume that an individual has an income of $3,000 this month and $3,300 next month. He can
borrow and lend money between the two periods at an interest rate of 10%. Given his
preferences he decides to borrow this month $1,000. a. Show graphically his decision problem. Draw the budget constraint and include
quantity consumed this month and the next month, the indifference curve and
intercepts (10p).
b. Assume that given his good performance, his income in the next month increases by
$1,100. Given this, he decides to borrow $1,500 this month. Show in the graph his
new decision problem. (5p) 4. Assume that a consumer has a monthly income of $1,000 that he can spent in education or in
other goods. Assume that at a price of $50 per unit of education, this consumer decides to buy
11 units of it. After an excise subsidy that lowers the price for the consumer to $40 (the subsidy
is equal to $10 per unit of education), this consumer decides to buy 15 units of education.
a) Represent graphically the consumer choice problem. Include quantities consumed of both
goods and the budget constraints for the tax/no tax case. (5p)
b) Estimate and show in a graph, how much money is the government giving as a subsidy. (5p)
c) Using the graph, what can you tell me about the price elasticity of demand for education?
Explain (do not estimate it, just by looking at the graph). (5p)
d) Show graphically the decomposition of the effect of the change in price in substitution effect
and income effect. By how you graphically showed your income effect, what can you tell
me about education? (10p)
e) Show graphically a case where the government instead of giving an excise subsidy, it gives
a lump sum subsidy of the same amount that in the previous case. Demonstrate that the
consumer is going to be at least with the same level of utility than before (but not less). (10p)