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Microsoft Word - 101hw2f21 Professor Chisholm Economics 101D&E October 20, 2021 HOMEWORK #2 DUE DATE: WEDNESDAY, OCTOBER 27, 2021 This homework assignment is required and will be graded. Only homework submitted at the start of class on the due date will be accepted. You must show all formulas that you use and how you use them. Work problems neatly and in a logical, organized manner. Be sure to label all axes and graphs in your graphical analysis. PROBLEM #1 In a small town, there is one upscale coffee shop and one deli. The daily demand for coffee at the coffee shop, and the daily demand for soup at the deli, are presented below: Demand for Coffee Demand for Soup Price (per cup) Qd (cups) Price (per bowl) Qd (bowls) $7.00 650 $7.00 25 $6.00 700 $6.00 50 $5.00 750 $5.00 75 $4.00 800 $4.00 100 a. Suppose the coffee shop owner is currently charging $6.00 per cup of coffee and is considering lower the price to $5.00 per cup. Calculate the price elasticity of demand for coffee between $6.00 and $5.00. b. Is demand for coffee elastic, inelastic, or unit elastic in part a? c. Suppose the deli owner is charging $6.00 per bowl of soup and is considering lower the price to $5.00 per bowl. Calculate the price elasticity of demand for soup between $6.00 and $5.00. d. Is the demand for soup elastic, inelastic, or unit elastic in part c? e. Assume that both the coffee shop owner and deli owner will only cut their price (from $6.00 to $5.00) if doing so increases their revenues. Without making any further computations, determine which owner (if any) will make the price cut from $6.00 to $5.00. f. Briefly explain your answer in part e using the concept of price elasticity of demand. PROBLEM #2 The supply and demand schedules for bicycles is shown below: Price/Bike Quantity Supplied Quantity Demanded $200.00 725 1,453 350.00 850 1,132 475.00 955 955 600.00 1,245 624 900.00 1,540 275 a. Find the equilibrium quantity and price for bicycles in this market. b. The local government wants to encourage more people to bike to work and so imposes a price ceiling on bikes, such that bike stores cannot sell bikes for more than $350 each. Will this market experience a surplus or a shortage? Find the size of this surplus or shortage. (You may find it helpful to sketch the demand and supply curves, although a graph is not required for this problem.) c. If the price ceiling were set at $600 instead, how many bicycles would be exchanged? PROBLEM #3 The following graph represents the demand and supply for a product. The local government decides to impose a per-unit tax of $4.00 on this product. (Assume that the sellers must remit $4.00 to the government for every unit of the product they sell.) Answer the questions on the next page. PROBLEM #3 (CONTINUED) a. On the graph on the previous page, draw the new supply curve after the tax goes into effect. b. What is the new price that consumers will now pay for this product? c. By how much has the price to consumers risen, as compared to the price before the tax went into effect? d. What is the new price that producers receive, per unit sold, after they have paid the tax? e. By how much has the net price received by producers fallen? f. Compare your answers in parts c and e. Which side of the market (consumers or producers) bears the larger burden of the tax, or do they bear the burden equally? g. Based on your answer to part f, and without doing any further computations, is demand more elastic than supply, is supply more elastic than demand, or are supply and demand equally elastic? Briefly explain your answer. PROBLEM #4 The following graph shows the demand curve for hamburger sliders. a. Compute the elasticity of demand between $.50 and $1.00. Is demand elastic, inelastic, or unit elastic between these two prices? b. Find the total revenue when price is $.50 and compare it to the total revenue when price is $1.00. Does revenue rise, fall, or remain constant when price rises from $.50 to $1.00? c. Compute the elasticity of demand between $1.00 and $1.50. Is demand elastic, inelastic, or unit elastic between these two prices? d. Find the total revenue when price is $1.00 and compare it to the total revenue when price is $1.50. Does revenue rise, fall, or remain constant when price rises from $1.00 to $1.50? e. Briefly explain why total revenue can increase when the price of a product rises. Be sure to include the concept of elasticity in your answer. PROBLEM #5 Charlotte likes to go to Red Sox games at Fenway Park; she also enjoys listening to concerts by the Boston Symphony Orchestra at Symphony Hall. Charlotte has $200 to spend on Red Sox and concert tickets. The price of a Red Sox bleachers ticket is $50, and the student price for attending a symphony concert is $25. The following table represents Charlotte’s total utility from Red Sox games and from attending symphony concerts: Q Red Sox Games Total Utility Marginal Utility (MUR) MUR/PR 0 0 1 4,000 2 7,750 3 10,750 4 11,750 5 12,500 Q Concerts Total Utility Marginal Utility (MUC) MUC/PC 0 0 1 2,000 2 3,500 3 4,625 4 5,375 5 5,875 a. Find Charlotte’s marginal utility of Red Sox games and concerts for each of the quantities above (that is, fill in the first column of the table for each type of outing). b. Does Charlotte experience diminishing marginal utility for both products? c. Now find the marginal utility per dollar spent on each product (that is, complete the second column of the table for each type of outing). d. If Charlotte’s goal is to maximize her utility, determine how many Red Sox tickets and how many concert tickets she will purchase. Clearly demonstrate how you derived your answer. PROBLEM #6 Liam opened a craft beer store in January 2020. During the first twelve months, the store generated $300,000 in revenue. Liam hired a beer specialist to help with sales, and another person to stock beer at the store; their annual salaries were $24,000 and $12,000, respectively. The market value of the refrigerators and other equipment in January 2020 was $130,000; by January 2021, the market value was $110,000. The costs of beer and other supplies was $220,000 over the year. The value of Liam’s entrepreneurial and business skills running this business during the first year was $27,000. In addition to managing the business operations of the beer store, Liam also helped with running the cash register; if he had worked for another shop during these hours he would have earned $18,000 in wages over the year. If instead of investing in his own business Liam had invested in an alternative investment opportunity, he would have earned $8,000 in interest over the year. a. Find the cost of resources bought in the market. b. Calculate the implicit rental rate, including economic depreciation and foregone interest. c. Determine the cost of resources provided by the owner. d. Based on your findings in parts a through c, find Liam’s economic profit. e. Liam’s accountant has determined that accounting depreciation on his equipment over the year was $7,000. Determine Liam’s accounting profit. f. Compare the economic and accounting profits you found; briefly explain any differences.