1. An increase in the market price of men’s haircuts from $15 per haircut to $25 per haircut initially causes a local barbershop to have its employees work overtime to increase the number of daily...

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1. An increase in the market price of men’s haircuts from $15 per haircut to $25 per haircut initially causes a local barbershop to have its employees work overtime to increase the number of daily haircuts provided from 35 to 45. When the $25 market price remains unchanged for several weeks and all other things remain equal as well, the barbershop hires additional employees and provides 65 haircuts per day. a. What do we expect will happen to the price elasticity of supply as we move from the short run to the long run? Explain. b. Calculate the short run price elasticity of supply. c. Calculate the long run price elasticity of supply. d. Do your results in (b) and (c) fit your answer in (a)? Explain how the barbershop’s actions in the long run resulted in this change in elasticity. 2. For each of the following, state whether you think it would be inelastic or elastic in supply. Explain your reasoning. (There is no particular right or wrong answer. Your explanations should account for the factors that affect the price elasticity of supply) a. Oranges b. Shoes c. Cars 3. A 0.1% tax is levied on medical services. Answer the following: a. Do you expect the demand for the good to be relatively elastic or inelastic? Explain. b. Do you expect the supply for the good to be relatively elastic or inelastic? Explain. c. Based on the three above relevant factors, would you expect this tax to have a relatively large or small deadweight loss? Explain. d. Which do you expect to be lower, the price elasticity of demand or the price elasticity of supply? Explain. e. Based on the above, who will pay more of the tax, buyers or sellers? Explain. 4. Why do we expect the price elasticity of demand for a good to increase when the price increases, ceteris paribus? 5. If a good has negative externalities, and the government imposes a tax to bring the market to the social optimum, both consumer surplus and producer surplus will decrease. Does anyone gain utility? If so, whom? 6. We’ve presumed that when we consume goods, our marginal utility decreases as we consume more of a good. a. Does the marginal utility of a dollar of income decrease as one earns more? Explain. b. Does your answer support or challenge the idea that redistributing income can increase overall utility in a society? Explain. (Hint: another way of asking about marginal utility is the following: would an extra $100 be equally valuable to someone earning $10,000 per year as to someone earning $10,000,000 per year?)
Dec 19, 2019
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