Problem 1: Ali inherits $10,000 from his great-great aunt in 2008. His great-great aunt’s will requi

Problem 1: Ali inherits $10,000 from his great-great aunt in 2008. His great-great aunt’s will require thatAli spend the money before December 31, 2009. He has two spending options: He can spend the amounteither in 2008 or in 2009. Suppose this is Ali’s only source of income and the interest rate on loans orsavings is 10 percent.(a) How much could Ali spend in 2008 if he only consumes in 2008? How much could Ali spend in 2009 ifhe only consumes in 2009?(b) What is the opportunity cost of consuming $1.00 in 2008 in terms of forgone consumption in 2009?Draw Ali’s budget constraint and optimal consumption bundle, considering that the spending in 2008 ismeasured along the horizontal axis.(c) Ali decides to spend $6,000 in 2008 and $4,400 in 2009. Show this optimal consumption bundle usinga budget constraint and indifference curve diagram.Problem 2 (10 Points – Theoretical – Paragraph Form): Suppose Sam and Kevin can produce pens andpencils as shown in the table below.SamKevinPens12 hours4 hoursPencils8 hours6 hours(a) Who has a comparative advantage in producing pens? Who has a comparative advantage inproducing pencils?(b) Suppose Sam and Kevin have to each give Flip, a common friend, 10 pens and 10 pencils. Is there atrade that will make both of them better off? If a trade that would make both of them better off exists,describe such a trade. If there is no such trade that would make both of them better off, explain why.Problem 3 (10 Points – Calculation): If demand is represented by Qd = 50 – 0.5P + 0.005I where I =$50,000 and supply is represented by Qs = 100 + 0.4P -2W where wages (W) = $15.00, compute theequilibrium price and quantity. What happens if income falls to I = $40,000?Problem 4 (10 Points – Calculation): Always Round Tire finds that their demand curve is P = 50 − .02 Q(note: Marginal Revenue has twice the slope as the demand curve). What price and quantitycombination will maximize the firm’s revenue? What are the total revenue and price elasticity at thispoint?Problem 5 (10 Points): You are given the following information: (a) Your firm’s demand equation isdefined as follows:product,Qd =100−4 P A +2 Ps +.1 I , where Qd is the quantity demanded for yourP A is the price that you charge for your product,Ps is the price that a competitorcharges for a substitute product, and I is the income for your consumers. You have a current estimatefor all of the variables (at the present levels): (a)Qd : 160, (b)P A : $20.00, (c) Ps : $20.00, and(d) I: $1,000. Answer the following questions:(a) Calculate the elasticity of demand with respect to changes in your price. Comment on what thisresult implies (one to two sentences will suffice).(b) Calculate the elasticity of demand with respect to changes in your competitor’s price. Comment onwhat this result implies (one to two sentences will suffice).(c) Calculate the elasticity of demand with respect to changes in the income of your consumer. Commenton what this result implies (one to two sentences will suffice).Problem 6 (10 Points – Calculation): Always Round Tire is the only producer of tires for the new Britishimport, the Maxi Copper. Demand for a set of four tires is P = 800 – 5Q (note: Marginal Revenue hastwice the slope as the demand curve) while the cost incurred by the firm is MC = 15Q. What would bethe monopoly price and quantity? What would happen to price and quantity if the market was perfectlycompetitive (assuming the same costs)?Problem 7 (10 Points – Calculation): Cost Analysis – Fill in the following cost table.Quantity012345678910TotalCostMarginalCostTotal FixedCostTotal VariableCostAverage TotalCostAverage FixedCostAverage VariableCost201000—3815111175902023416337Problem 8 (20 Points): Given the following demand and supply curves: (a)Qd =−P+10 and (b)Qs=P .a) Calculate the inverse demand function (provide below) and graph the two lines on Figure 1 (5Points).b) Calculate and label the Consumer Surplus and Producer Surplus (5 points).Figure 1: Perfectly Competitive Marketsc)Add an additional line for marginal revenue (note that the slope of the marginal revenue line is twicethe demand curve), graph the demand, perfectively competitive supply, and the marginal revenueline on Figure 2. Identify the following areas on your new figure: (a) deadweight loss to the economy,(b) consumer surplus, and (c) producer surplus in this new market environment (10 Points).Figure 2: Monopolies