Draw a supply and demand diagram for beer. Answer the following questions .

  1. Show the impact on price and quantity if the government raises the legal drinking age.

  2. What will happen to price and quantity in the beer market if the price of wine drops? Justify your answer.

  3. What will happen to price and quantity in the beer market if the price of potato chips drops? Justify your answer.

  4. If consumer income goes up by 10 percent, beer consumption goes up by 8 percent. Is beer a normal good or an inferior good?

  5. Define the income elasticity of demand for beer. Could this elasticity ever be negative?

  6. A new tax raises the price of beer from $2 a bottle to $2.20 a bottle. If weekly sales without the tax were 10,000 bottles and demand is unit elastic (the elasticity equals one), what will weekly sales be after the tax? If the quantity sold falls from 10,000 bottles to 8500 bottles, is demand elastic or inelastic?

    7. In an hour, HurryLube's team of three service technicians can do 16 oil changes or 2 radiator flushes. Assume that the trade-off is linear (a straight line). Answer the following questions.

  7. What is the scarce resource?

  8. Draw the production possibility frontier--be sure to label the axes. What is the opportunity cost of one radiator flush?

  9. Is the combination of 10 oil changes and 1.5 radiator flushes inside or outside the production possibility frontier? What does this say about that combination?

  10. Is the combination of 2 oil changes and 1.5 radiator flushes an efficient use of the scarce resource? Explain.