(b) Assume that a lump-sum tax is imposed on the producers of good x. What happens to the deadweight loss. Explain.
Dead weight loss is inefficiency,, in that someone (Third party) is being harmed and is not being compensated. The government steps in and (theoretically) taxes the producers causing them to internalise the cost of the externality. In theory, the costs of the producer increases and production decreases.
A lump-sum tax is viewed by producers as a fixed cost,, a cost of doing business with no connection to output. Fixed costs have to be paid if you produce or not. So, a lump-sum tax will not change or affect the variable costs (marginal costs) of a producer. Therefore, the firm who pays a lump-sum tax will not alter its amount of production. There will be no change in quantity produced and therefore would be ineffective as an incentive to get a producer to internalise the cost and produce less quantity of the negative externality.
IF marginal costs do not shift then the firm will stay at that profit max quantity.
Answer - One point is earned for stating that the deadweight loss does not change because marginal cost
does not change.
2. Assume (perfectly competitive). Typical firm is earning positive economic profit in the short-run.
(a) Draw a CLG for the typical firm.
One point is earned for a correctly labeled graph with a horizontal demand curve at the equilibrium price, PE.
One point is earned for showing the equilibrium quantity, QE, at MR = MC.
One point is earned for showing that ATC is below demand or MR at Q.
(b) Assume there is an increase in the market wage rate for labor, variable input. Show on your graph in part (a) the effect of the wage increase on the marginal cost curve in the short run.
The MC curve shifts left,,, (MC, think VC or wages)
(c) Assume the avocado producers hire labor from a perfect competitive labor market. Draw a graph of the labor supply and demand for a typical firm and label the supply curve MFC and the demand curve MRP. Assume the market wage rate increases form w1 to w2. Show the effect of a wage increase on the graph, the initial quantity of laboured hired at QL1 and the new quantity of labor at QL2.
Since the firm can hire its labor in a perfectly competitive labor market, the wage rate is determined by the market rate and it is a horizontal line. (They can hire all they want at that price)
Answer - One point is earned for drawing a correctly labeled graph with a horizontal MFC1 curve at w1 and a downward-sloping MRP curve and showing QL1. One point is earned for shifting the MFC curve up to w2 and showing the new equilibrium quantity of labor hired, QL2, which is smaller than QL1.
(a) Assume that the monopolist wants to maximise profits. Using the labelling on the graph, indicate the monopolist's price.
Profit max = MR = MC
Answer - One point is earned for identifying the profit-maximizing price as $24.
(b) When the output is $8, what is the profit per unit?
Profit per unit = TR - TC/ # units
TR = 8 x 24 = 192
ATC @ 8 units of production (follow the line up until you bump into the ATC curve.
ATC @ 8 units = $18 per unit or (8x18 = 144)
TR - TC = (192 - 144 = 48)
48/8 = 6
Profit per unit = $6
Answer - One point is earned for identifying the profit per unit as $6.
(c) Assume the monopolist is maximising profit. Is allocative efficiency achieved.
Demand = Price
Answer - One point is earned for stating that allocative efficiency is not achieved because
price is not equal to MC or MC is not equal to demand.
(d) Between the price of $16 & $18, is the monopolist in the elastic, inelastic or unit elastic section of the demand curve?
Answer - One point is earned for stating that the demand is inelastic because total revenue increases as price increases from $16 to $18, or because the price elasticity of demand within the price range is
less than 1, or because marginal revenue is negative.
(e) Assume the regulators set an output of 11 units.
(i) Is the monopolist earning positive economic profits?
(ii) Is the monopolist earning positive accounting profits?
If the monopolist is forced to produce 11 units he will just be covering his costs, accounting profits will be covered (explicit) but implicit costs (opportunity costs) will not be covered. As there is no entrepreneurial profit.
Answer - One point is earned for indicating that the monopolist is not earning positive economic profit, because price equals average total cost. One point is earned for indicating that the monopolist is earning positive accounting profit.
(f) Assume the regulator imposes a price ceiling of $22.
(i) What is the marginal revenue for the 8th unit?
(ii) What quantity will be produced?
Answer - One point is earned for stating that the marginal revenue of the 8th unit is $22. One point is earned for stating that 9 units will be produced.
(g) Assume instead that the monopolist practises first-degree price discrimination (also called perfect price discrimination).
(i) What quantity will be produced?
(ii) What will be the consumers surplus.
8 units produced.
10 units produced
Perfect Price Discrimination = More profit
Each customer is charged the max he will pay, so zero consumer surplus
MR is the Market Price since the firm doesn't have to lower the price to sell more, P = MC = MR
More output produced so (10 units produced), Greater allocative efficiency
Answer - One point is earned for stating that 10 units will be produced.
One point is earned for stating that the consumer surplus is zero.
(a) The table above shows Theresa's marginal utility from bagels and toy cars. (i) What is here total utility from purchasing three toy cars?
So simple it's easy to get wrong... overthinking again?
3 toy cars (10+8+6) = 24 utils
Answer - One point is earned for determining the total utility, which is 24.
(ii) Theresa's weekly income is $11, the price of a bagel is $2 dollars, and the price of a toy car is $1.
What quantity of bagels and toy cars will maximise Theresa's utility if she spends her entire weekly income on bagels and toy cars?
Explain using marginal analysis.
First, you must know the formula..
Then make a chart------
If you get to a place where both purchases have the same utility then you will be indifferent,, either one will do as long as you have cash to spend.
Answer - One point is earned for stating that three bagels and five toy cars will be purchased.
Answer - One point is earned for explaining that with this combination of bagels and toys, the marginal utility per dollar spent on bagels equals the marginal utility per dollar spent on toy cars.
(b) Assume that the price of wheat, an input for the price of bagels, increases. Will Theresa's demand for bagels increase, decrease, or remain unchanged. Explain.
Remember, that input prices affect suppliers of a good,, not demanders.. So, Theresa will not change her demand for bagels if the price of wheat increases.
Answer - One point is earned for stating that Theresa’s demand for bagels will not change because the increase in the price of wheat will affect the supply of bagels, not the demand. (c) Suppose that Theresa's income elasticity for bagels is -0.2. Does the value of Theresa's income elasticity indicate that bagels are a normal good, inferior good, substitute, or compliments?
Answer - One point is earned for stating that bagels are inferior goods. (d) Suppose the price of toy cars increase by 10%. Theresa buys 5% fewer toy cars and 4% less of a different toy, blocks. Calculate the cross-price elasticity for toy cars and blocks, and indicate if it is positive or negative.
You gotta be *&(6%^# kidding me.
% change in Qd = -.04 (4% less)
% change in Price = .10
Answer - One point is earned for calculating the cross-price elasticity for toy cars and blocks:
1. Steverail, the only provider of train service operating between two cities, is currently incurring economic losses.
The only provider = Monopoly
incurring losses = draw a monopoly graph showing a loss
(a) Using a CLG, show each of the following. (i) Steverail's loss-minimizing price and quantity, labeled Pm and Qm, respectively. (ii) The area of economic losses, shaded. (iii) The allocatively efficient quantity, labeled Qe.
(b) If Steverail raises the price above Pm, identified in part (a) (i), would total revenue increase, decrease, or not change.
Ok, I have drawn a total revenue curve on the bottom of the monopoly curve for Steverail's business.
If you know that where MR = 0 is unit elasticity then you know that the Demand curve above unit elasticity is the elastic section. In the elastic section of the demand curve, if a monopolist raises his price his revenue will decrease.
Answer - One point is earned for stating that the total revenue would decrease because the demand
is price elastic in that range of the demand curve where MR > 0.
(c) Assume a per-unit subsidy is provided to Steverail.
(i) Will Steverail's quantity increase, decrease, or not change? Explain.
Per-unit subsidies are viewed as Variable Costs (VC) and therefore shift the MC curve right and the ATC curve down. Quantity is increased and prices fall. A shifting of the MC curve also means that there is a new profit-max (MR = MC), hence the new lower price and greater quantity.
Why is the Per-Unit Subsidy considered a variable costs,,, because you only get the subsidy based on the amount you produce. If you don't produce you get nothing,,, so the amount of the subsidy you receive is variable.
Answer - One point is earned for stating that the quantity will increase because the subsidy will
cause the MC curve to shift downward and intersect the MR curve at a larger quantity. (ii) Will consumer surplus, increase, decrease, or not change?
A lower price will increase consumer surplus.
Answer - One point is earned for stating that the consumer surplus will increase.
(d) Assume instead that a lump-sum subsidy is provided to Steverail. For the short-run answer the following. (i) Will the dead weight loss increase, decrease, or remain unchanged? Explain.
Ok,, so let me paint a picture. You are operating a coffee shop outside of your high school. On day a man stops by and gives you a $1,000 dollars (subsidy)... Does this effect what you pay your employees? Does this cause you to sell more coffee/ less coffee? No it doesn't,, your employees keep selling the same amounts of coffee as before. You now just have an extra $1,000 dollars in your pocket.
Deadweight loss is an inefficiency in that profit maximizing monopolies produce where MR = MC, and we know that at P = MC is allocative efficiency (no DWL)... So a lump-sum subsidy causes no change in quantity produced and does not effect DWL, society is no better off, but it does make you $1,000 richer.
Answer - One point is earned for stating that the deadweight loss will not change because the lumpsum
subsidy does not change the profit-maximizing quantity.
(ii) Will Steverail's economic losses, increase, decrease or not change?
A lump-sum subsidy will decrease the loss,,, money in your pocket will decrease your overall losses.
Answer - One point is earned for stating that economic losses will decrease.