ECO203 HW 2

Homework assignment #2 for Micro: (40 Points Total) 1. In 2020 due to state deregulations ridesharing company X managed to lower its price which led to higher quantity demanded of their rides (a movement along the demand curve). The accompanying table describes what happened to prices and the quantity demanded of their service. Using the midpoint method, calculate the price elasticity of demand for the rides. (4 points) The PED is approximately -2.1 and would be indicate an elastic demand. 2. What can you conclude about the price elasticity of demand in each of the following statements? (3 points each =6 points) a. “The pizza delivery business in this town is very competitive. I’d lose half my customers if I raised the price by as little as 10%.” I believe the pizza would be an elastic good. b. A recent government legislation brought price of lifesaving drug X down by more than 300%, yet there was no change in quantity demanded of the said drug. It seems this would be deemed as an inelastic good because for example, if the cost of gold and gasoline were somehow to be marked down 300%, there aren’t many people that wouldn’t immediately jump on the opportunity to buy as much as possible. It seems to me that this life- saving drug is used in rare instances because as it’s stated, there is no change in demand. 2008 2012 Quantity demanded (rides) 130 million 420 million Average price (per ride) $25 $15 /4 1

3. Use price elasticity of demand concept to explain each of the following observations: Say how elastic the demand is for products mentioned in each question. (4 points each = 8 total) a. To increase total revenue, “Fresh Fruit Store” decides to increase price of its oranges but decrease price of apples. This would be deemed inelastic because consumers are not very responsive to price changes for oranges however, the demand for apples would be elastic because are more responsive to price changes. b. To raise revenue the local government in “Smallville” adds a $5 excise tax on consumers of product X, priced at $15. However, suppliers of good X end up paying the entire $5 excise tax. I would say this would be elastic due to the fact that suppliers end up paying the entire $5 excise tax. 4. You operate a company that produces good X. Your Pixed cost is $8,000 per month. You can hire workers for $7,000 per worker per month. Your monthly production function for good X is as given in the accompanying table. (13 points total) a. For each quantity of labor, calculate average variable cost ( AVC ), average Pixed cost ( AFC ), average total cost ( ATC ), and marginal cost ( MC ). (0.28 for each correct answer =7) b. On the diagram below (or your own diagram), draw the AVC, ATC, and MC curves. (4 points) Quantity of workers Quantity of good X AVC AFC ATC TC MC 0 0 N/A N/A N/A N/A 1 550 12.73 14.55 27.27 15,000 N/A 2 1,420 9.86 5.63 15.49 22,000 8.05 3 1,880 11.17 4.26 15.43 29,000 15.22 4 2,200 12.73 3.64 16.36 36,000 21.88 5 2,400 14.58 3.33 17.92 43,000 35 /4 2

e) What share of the excise tax per unit of X do sellers end up paying? _______33%________ (2 points) /4 4