Quiz One

Quiz One &n= bsp; = ; &n= bsp; = ; &n= bsp; = ; &n= bsp; Name__________________

PPA 723, Fall 2003

Professor John McPeak

October 1, 2003

Total quiz is worth 20 points, each numbered question = is worth 2 points, and each sub question (the a / b= / c / d parts) are worth equal shares of the two points.

1= ) If I give you the following demand equation:&= nbsp; Q=3D286-20*p (more processed pork!!!),

= a. = Fill in the quantities for the following table

Price<= /o:p>	Quantity
5
4
3
2
1

= b. Draw this curve.

= c. = Calculate the elasticity (not the arc elasticity) using the starting point values for price and quantity as we move along the demand curve

Price<= /o:p>	Elasticity<= o:p>
From 1 to 2
From 2 to 3
From 3 to 4
From 4 to 5

= d. Which of these calculated elasticities are inelastic,= which are unit elastic, and which are elastic?

2= ) Match the outcome to the policy that could generate it and show the impact on a supply and demand curve. Labe= l all curves, axes, and points.

Policy:

Price floor.

Price ceiling.

A specific tax on sup= pliers.

Relaxing production regulations.<= /i>

Outcome           &nbs= p;            &= nbsp;           &nbs= p;                   &= nbsp; Policy

Government distribution of= &nb= sp;                   &= nbsp;   ______________________

surplu= s agricultural commodities

to the needy.

Equilibrium price paid by = consumers  &= nbsp;                 &= nbsp;   ______________________

increa= ses and quantity sold decreases

Consumers wait in lines         &= nbsp;           &nbs= p;            &= nbsp;        ____________________= __

      to obtain the good (due to non-market rationing)

Equilibrium price paid by = consumers   =             &nb= sp;        ______________________=

decrea= ses and quantity sold increases

3= )      If p₁ =3D 5, p₂=3D20, and Y=3D200

= a.      = Draw the budget constraint.

= b.      Show how you can derive the price consumption curve for a given consumer’s preferences (drawn as you like so long as they obey the properties of indifference curves discussed in class) from the price consumption curve us= ing the example of p₁ =3D 2 all else constant, and p₁ =3D&n= bsp; 10 all else constant

= c.      = Show how to derive the individual’s demand curve from the graph in (b).

4= )      Income elasticities.

= a.      = What does an income elasticity tell you (in words or = in the formula)?

= b.      What do we call a good for which the income elasticity is negative and how do you describe what this means in words?

= c.      = Show an optimal bundle using a budget line and an indifference curve. Assume the consumer receives a increase in income.= Show how the location of the new bundle allows us to describe whether good one and good two are inferior or normal goods (describe the three quadrants in terms of which good is inferior and which is normal if the new bundle is located there).

= d.      Why is it impossible for both goods in a two good world to be inferior (for the optimal bundle to be in the fourth quadrant of what you drew above given an income increase)?

5= )      Your friends Green Gary and Fox-Fan Frieda are arguing again. Today, they are arguing about whet= her the government should or should not increase the specific tax on gasoline in the US. They have asked you, the expert economist, to help settle their argument.&= nbsp; You remember from class discussion that the own price elasticity of demand for gasoline is inelastic both in the short run and the long run. Assume that the price elasticity of supply for gas is unit elastic in your response.

= a.      = Green Gary argues that the US uses too much gasoline and this has a negative environmental impact. He supports the idea of a specific= tax on suppliers. He predicts that p= lacing a specific tax on suppliers will bring about a smaller percentage change in= the price consumers pay than the percentage change in quantity demanded. Is he right? Why or why not.

= b.      Fox-Fan Frieda says that Green Gary’s specific tax will place a massive burde= n on the strategically important gasoline production industry and this will thre= aten our national security. She ar= gues that the specific tax should be placed on consumers, since this will reduce= the burden of the tax on this critically important industry and divert the burd= en to the consumers who are less critical to our national security (!!!). Is she right? Why or why not.

= c.      = Explain to them using supply and demand graphs the likely impact of a specific tax = on suppliers and a specific tax on consumers, and note the implications for incidence of the tax on suppliers and demanders.

= d.      Explain to them in words what you just drew so that they can understand the logic of your argument.

6= )      If we know Q_d=3D200-2*p and Q_{s=3D100+3*p
characterizes the market in Sy=
racuse
for day care centers for three year old children (with places per day as the
unit for quantity and price per day as the unit for price).}

= a.      = what is the equilibrium price quantity pair?

= b.      Draw the implied supply and demand curves. Label all axes and curves.

= c.      = To help working mothers return to work, a local councilor is suggesting a poli= cy that will require day care costs to be below 50% of pre-tax wages at the mi= nimum wage in Syracuse. Assume she is arguing we should implement a maximum price of $15.00 per day. If the measure is implemented, will there be any change in the quantity of day care places provided from t= he current situation? Show this = on a graph and explain your reasoning.

7= )      I know the price of chicken soup is $1.00 per unit and the price of bread is $2.00 per unit, the marginal utility of soup at a bundle the consumer is considering buying is 3 and the marginal utility of bread is 2. This bundle is on the budget line.=

= a.      = Distinguish between diminishing utility and diminishing marginal utility by describing = what happens to utility and marginal utility if the consumer is given one more u= nit of bread.

= b.      Explain why the point where the consumer has the marginal utilities described above= is not the optimal bundle.

= c.      = Is the optimal bundle going to be composed of more bread and less soup or less bread and more soup than the bundle under consideration? Why?

= d.      Show on graph that illustrates indifference curves and budget constraints where = the consumption bundle described in the introduction to this problem lies in relation to the optimal bundle.

8) Due t= o the recent court case where McDonald’s has been sued for damages resultin= g from health problems arising from a Big Mac diet, the NYS legislature is conside= ring imposing a unit tax to be paid by consumers on Big Macs. This, it is argued, will discourage consumption of Big Macs and generate revenue to offset increased health car= e expenses incurred by the state.    Say you are asked to evaluate results from a study investigating the demand curve for Big Macs (I am making up these numbers by the way).

   &nbs= p;

= a)      If the own price demand elasticity is found to be -0.23, which of the two obje= ctives, discouraging consumption or increasing revenue, is likely to meet with more success if the tax is imposed?  = Why?

= b)      Show on a supply and demand graph the impact of the unit tax on consumers.

= c)      One legislator argues that it would be more effective to educate consumers about the health problems related to obesity in general and from Big Macs specifically. Show on a suppl= y and demand graph the impact of such an education program.

= d)      Describe how these programs are similar or different in their implications for price, quantity, and government revenue.

9) The price elasticity of demand for intercity bus tr= avel between Rochester and Syracuse is given to you as -2.0.

a.      = Is this inelastic, unit elastic, or elastic?

b.      The current price is $20.00, and there are 300 passengers a day. The new guy on staff is arguing th= at we have to increase the price of the trip to $21.00 to earn more money for the company. How many riders will= there be if the price is raised to $21.00?

c.      = Does this price increase lead to an increase or decrease in overall revenue on t= he route per day for the bus company? Show your calculation for this answer.

d.      The boss has asked you to evaluate the new guy’s proposal. Describe in words whether it is a = good idea or not, how you have come to this evaluation, and how your finding is related to the nature of the substitutes available in your industry.

10) The good in question is natural gas consumption by residential consumers in Central New York in a calendar year. Provide a (no = more than 2 sentence) story for each of the following shifts that describes what= has changed in the real world to bring about such a shift (like I make up stori= es about leaf taxes and “pork, whitens your t= eeth and freshens you breath” campaigns).