ECON 1001X Assign 2 2020 21f

1 Mount Allison University Principles of Microeconomics (ECON 1001X) Self-directed Distance Learning Academic Year 2020 – 2021 (Spring 2021) Assignment 2 (Based on Chapters 4 and 5) Question 1 For each of the following events, state the relevant elasticity concept. Then calculate the measure of elasticity, using average prices and quantities (i.e., midpoint formula). In all cases, assume that these are ceteris paribus (i.e., all other things being equal or held constant) changes. 1.1 When the price of mustard increases from $3.90 to $4.60, quantity demanded for hotdogs declines from 11,500 to 10,120. 1.2 In response to an increase in the price of farmed salmon from $3.79 to $5.14 per pound, producers increase their supply from 930 to 1,470 pounds. 1.3 When the price of a dozen of eggs increases from $4.10 to $4.85, egg sales decrease from 1,700 to 1,600. 1.4 As average household income per month decreases from $4,000 to $3,200 annual sales of red meat increases from 9,600 to 15,000 pounds. Question 2 What would you predict about the relative own price elasticity of demand for each of the following items? Explain your reasoning. a. food b . vegetables c. leafy vegetables d. leafy vegetables sold at your local supermarket e. leafy vegetables sold at your local supermarket on Wednesdays

2 Question 3 The following demand equation is specified for a good in the market: In addition, the following supply equation is given for the same good in the market: , where and are quantity demanded and quantity supplied, respectively, and P is the price of the good in the market. 3.1 Calculate the equilibrium price and quantity transacted in the market. 3.2 Now assume that the government implements a price floor policy for the good and set the output price to be $110 per unit. Calculate the new quantity demanded and supplied transacted in the market. 3.3 Calculate the amount of excess supply and the government total expenditure to purchase the amount of excess supply . Question 4 Fill in the blanks to make the following statements correct. 4.1 When a 10 percent change in the price of a good brings about a 20 percent change in its quantity demanded, we calculate the price elasticity of demand to be ____________ . We say that demand for this good is __________ . 4.2 When measuring elasticity of demand we calculate the percentage change of both __________ and ____________ . When calculating the percentage change it is important to divide the change by the __________ value of the variable. By doing so we avoid the problem of having a different measure depending on our starting point. 4.3 Consumers respond to a price change differently over time. Demand tends to be relatively __________ over short periods of time. Demand tends to be __________ in the long run than in the short run. 4.4 If producers can easily switch production from strawberry jam to any other kind of jam, then the elasticity of supply of strawberry jam will be relatively ___________.

4 Question 7 Assume that the demand for a good is represented by the equation and supply is specified by the equation , where and are quantity demanded and quantity supplied, respectively, and P is the price of the good. When solving for the equilibrium price and equilibrium quantity transacted in the market (in the absence of the government), the following results were found: 7.1 Suppose that the government imposes a tax of $1 per unit of the good produced. Calculate the new equilibrium price that consumers would pay (i.e., ), the new equilibrium price that producers would receive (i.e., ), and the new equilibrium quantity transacted in the market. 7.2 Compute the government tax revenue as a result of implementing the tax policy. 7.3 Given your answer in [7.2], compute the share of consumers and producers in the collected tax revenue. 7.4 Calculate the amount of deadweight loss ( DWL ) generated as the result of implementing the tax policy. In addition, compute consumers’ and producers’ share in the total DWL . Question 8 Given the following diagram, answer questions 8.1 to 8.3:

5 8.1 P 2 represents a price imposed by the government. What is the quantity of this good that would be exchanged in the market? A) Q 0 B) Q 2 C) Q 1 D) Q 4 E) Q 3 8.2 To be effective, a price floor must lie A) within the boundaries of P 2 and P 3 . B) below P 1 but above P 3 . C) above P 1 but below P 2 . D) anywhere above P 1 . E) anywhere below P 1 . 8.3 Suppose P 3 represents a price imposed by the government. The result would be A) excess supply of Q 3 Q 4 . B) excess supply of Q 3 Q 0 . C) excess demand of Q 0 Q 2 . D) excess demand of Q 1 Q 2 . E) excess demand of Q 3 Q 4 . 8.4) Concert promoters often set ticket prices below what they expect the market-clearing price to be. They are effectively imposing a ________ and the result is often ________ at a considerably higher price. A) price ceiling; ticket scalping B) price floor; ticket scalping C) price ceiling; a surplus D) price floor; a shortage E) fair price; excess tickets 8.5) In the presence of binding rent controls, the shortage of housing is smaller A) the higher is the elasticity of demand for housing. B) the lower is the elasticity of supply of housing. C) the longer is the length of time the rent controls are in place. D) the greater is the difference between the equilibrium price and the rent-controlled price. E) the more elastic is the long-run supply of housing.

7 8.9) Consider the demand curve for a product such as movie tickets, which shows how many tickets consumers wish to purchase at each possible price. Alternatively, we could view this demand curve in the following way: A) For each quantity of movie tickets, the demand curve shows the additional cost to the producer of supplying that particular movie ticket. B) For each quantity of movie tickets, the price on the demand curve shows the value that consumers place on that particular movie ticket. C) For each quantity of movie tickets, the demand curve shows the economic surplus generated by the purchase of the tickets. D) For each possible price, the demand curve shows the economic surplus generated by the purchase of the tickets. E) For each quantity of movie tickets, the demand curve shows the extent of market inefficiency and deadweight loss. 8.10) Suppose a downward-sloping demand curve intersects the horizontal axis at a point where quantity demanded equals 1250 units. What is the "value" that consumers place on the 1250th unit of this good? A) a negative value B) a positive value C) $1,250 D) $0 E) It depends on the position of the supply curve. 8.11) In general (and in the absence of market failures), economic surplus will be maximized and economic efficiency will be achieved A) when the government is able to impose an equilibrium price. B) when consumers and producers can agree on the most advantageous division of economic surplus. C) when resources are allocated such that production of the good is maximized. D) in a competitive market where price is free to achieve its market-clearing equilibrium level. E) when the government successfully determines what is best for society as a whole. 8.12) Which of the following statements most accurately describes the concept of deadweight loss? A) the overall loss of economic surplus that occurs when a market is inefficient B) the loss of production that occurs when a binding price floor or ceiling is imposed C) the loss of consumption that occurs when a binding price floor or ceiling is imposed D) the total market value of the goods no longer produced when quantity exchanged is below the equilibrium quantity E) the loss of economic surplus to consumers