ECO203 HW 2

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