# Microeconomics

Dec 25th, 2013
Anonymous
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Question description

Question 1

Use separate demand and supply diagrams to illustrate and explain the following impacts on the market equilibrium price and quantity of natural gas in each of two periods, ceteris paribus. Your diagrams should show a net decrease in the price of natural gas in the first period and a net increase in the price of natural gas in the second period.

Period 1
1.Technological progress occurs in natural gas extraction methods.
2.An increase occurs in the use of motor vehicles powered by natural gas.

Period 2
1.The price of oil increases.
2.Population shifts occur to warmer parts of the country, reducing the use of natural gas for heating homes and offices.

Question 2
A firm operating a chain of coffee houses has estimated the daily demand for coffee at one of its coffee houses to be P = 12,000 – 0.16Q, where P is measured in cents.
1.This coffee house sells coffee for \$4.00 per cup. How many cups of coffee does it currently sell each day?
2.The manager of the coffee house observes that there has been an increase in local competition and argues that the price of a cup should be reduced by 25 cents. Do you agree? Justify your conclusion based upon your estimate of the own-price elasticity of demand (use the mid-point method to calculate the own-price elasticity of demand).
3.The coffee house also sells 1200 muffins per day at \$4.20 each. The manager found that her daily sales fell to 800 when she increased the price of muffins from \$4.20 to \$4.40. What is the own-price elasticity of demand for muffins (use the mid-point method to calculate the own-price elasticity of demand)? Is demand price-elastic or price-inelastic?
4.The coffee house manager also found that her daily cheesecake sales increased by 1 per cent when the price of muffins increased from \$4.20 to \$4.40. Specify and calculate the elasticity that the manager can use to explain this phenomenon. Interpret its value. What does this elasticity value tell the manager about the relationship between muffins and cheesecake?
5.Most of the people coming to the coffee house work in financial offices in the city. Finance workers recently received a 5 per cent increase in salaries and wages. The manager noticed that since the wage and salary increase her daily sales of cups of coffee had increased by 6.2 per cent. Calculate the elasticity value that the manager can use to explain this outcome, assuming all other factors influencing demand have not changed. Interpret its value. What does this elasticity value tell the manager about the nature of coffee?

Question 3 The market for tickets to an international football match can be described by the following demand and supply curves: Demand: Q = 200,000 – 500P Supply: Q = -25,000 + 400P where P is the price per ticket and Q is the quantity of tickets per match.
1.Construct the demand and supply graph for the football match. What are the equilibrium price and quantity in the ticket market?
2.At the market equilibrium price, what would be the total revenue from the match? 3.Calculate consumer surplus and producer surplus.
4.Assume that the government sets a \$200 price ceiling on match tickets in an effort to make them more affordable to the public. Does this policy get more or fewer people to attend the match? How many match tickets are sold? Depict this on your demand and supply diagram. 5.Calculate consumer surplus, producer surplus and any deadweight loss associated with the \$200 price ceiling. Indicate these surplus areas on your diagram. (Hint: substitute the quantity of tickets supplied in part 4 into the demand equation to find the corresponding price on the demand curve.
6.Does a price ceiling create an efficient and fair outcome in the market for match tickets? Explain why or why not. What type of activity might the price ceiling encourage?

Question 4 Suppose the government of a country decides to impose a ‘methane emissions tax’ on beef consumers. Assume that all beef produced is sold in the domestic market. With no tax, the equilibrium price of beef is \$30 per kilogram and the equilibrium quantity is 90,000 tonnes per year. Following the imposition of the tax, the new equilibrium quantity is 81,000 tonnes per year. Consumers pay \$36 per kilogram and producers receive \$20 per kilogram. 1.Construct a demand and supply diagram of the market for beef prior to, and following, the introduction of the tax.
2.How much is the tax on beef?
3.How much revenue does the government collect from the tax?
4.Calculate the tax incidence borne by consumers and producers. Who bears the greatest burden of the tax – consumers or producers? Explain the burden of the tax incidence in terms of the own-price elasticities of demand and supply (you do not need to calculate the elasticity values).
5.Assume that instead of taxing consumers, the government imposes the tax on beef producers. Does this alter the incidence of the tax? Explain using your demand and supply diagram of the market for beef.
6.Calculate the excess burden (deadweight loss) from the tax.
7.What is likely to be the effect on the demand for lamb of the imposition of the tax on beef

Question 5 Use an appropriate diagram (or diagrams) to illustrate and explain: 1.The type of market structure in which hair salons are operating. State any necessary assumptions to justify your choice of market structure. 2.The short-run and long-run impacts of the increase in number of hair salons on the market price and quantity of haircuts, and on an individual hair salon’s production decision. Start your analysis under the assumption that the market for haircuts is initially in long-run equilibrium and individual hair salons are earning zero economic profit.

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