Econ 102 Fall 2008 Silvia Prina PROBLEM SET 2 The due date for this assignment is Friday, October 3 AT THE BEGINNING OF CLASS. Please DO NOT EMAIL me your solution. Late assignments will not be accepted. Please answer clearly and show your work when necessary. Unreadable answers will be marked down. Use formulas and/ or diagrams where useful. Please staple your homework. Good luck! Problem 1 The New York Times reported (02/17/1996) that subway ridership declined after a fare increase: ?There were nearly 4 million fewer riders in December 1995, the first full month after the price of a token increased 25 cents to $1.50, than the previous December, a 4.3% decline.? a. Use these data to estimate the price elasticity of demand for subway rides. b. According to your estimate, what happens to the Transit Authority Revenue when the fare rises? Problem 2 Pharmaceutical drugs have an inelastic demand, and computers have an elastic demand. Suppose that technological advance doubles the supply of both products (that is the quantity supplies at each price is twice what it was). a. What happens to the equilibrium price and quantity in each market? b. Which product experiences a larger change in price? c. Which product experiences a larger change in quantity? Problem 3 The supply and demand of broccoli are described by the following equations: Supply: Q S = 4P - 80 Demand: Q D = 100 ? 2P Q is in bushels and P is in dollars per bushel. a. Graph the supply curve, demand curve, equilibrium price, and equilibrium quantity. Shade the Consumer Surplus area and indicate it by CS. Shade the Producer Surplus area and indicate it by PS. b. Calculate Consumer Surplus, Producer Surplus, and Total Surplus. c. Suppose that the government places a tax T on the sales of broccoli. Illustrate on a new graph the effect of this tax on the equilibrium. Indicate on the graph the new equilibrium price P 2 and quantity Q 2 , the price buyers pay P B , the price sellers receive P S . Shade the Consumer Surplus area and indicate it by CS. Shade the Producer Surplus area and indicate it by PS. Shade the government revenue and indicate it by GR, shade the deadweight loss, if any, and indicate it by DL. Econ 102 Fall 2008 Silvia Prina Problem 4 The number of repairs produced by a computer repair shop depends on the number of workers as follows: # workers # repairs (per week) (per week) _________________________________________ 0 0 1 8 2 20 3 35 4 45 5 52 6 57 7 60 Assume that all inputs (office space, telephone, utilities) other than labor are fixed in the short run. a. Add two additional columns to the table, and enter the marginal product and average product for each number of workers. b. Over what range of labor input are there decreasing returns to labor? c. Over what range of labor input is marginal product greater than average product? What is happening to average product as employment increases over this range? Problem 5 The sixth volume of the Harry Potter saga sold more than 8.9 million copies in the first 24 hours it went on sale in the United States and Britain. In book publishing fixed costs are very high and marginal costs are very low and fairly constant. a. Suppose that the fixed cost of producing the new Harry Potter volume is $30 million. What is the average fixed cost if the publisher produces 5 million copies? 10 million copies? 20 million copies? b. Suppose that the marginal cost of producing the Harry Potter book is $1.50 per book and is the same for each book up to 40 million copies. Assume this includes all variable costs. What is the average total cost is the publisher produces 5 million copies? 10 million copies? 20 million copies? Problem 6 Ex. 11 page 205 sxp234 Microsoft Word - PS2Fall2008
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