ECON 201 Assignment 1 PDF

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Karli Haugan

UCID:30098164

ECON 201, Lec 04

University of Calgary Department of Economics

Principles of Microeconomics Assignment 1: due October 1, 2019 Econ 201(04)

Robert Oxoby

Fall 2019

[email protected]

Instructions: • • • •

The assignment is due on Tuesday, October 1, 2019 by 16:00. All assignments should be uploaded to D2L by this time. You are encouraged to work with your classmates. However, you are required to submit your own work. Please make sure you show and explain how you derived your answers. Please make sure your assignment is marked with you name and UCID, course name and number, and course section.

Concepts 1. Use the concept of the marginal thinking to evaluate the following statement: “The optimal (best) levels of pollution, crime, and safety are greater than zero.” Marginal thinking is how people make decisions by weighing the benefits and costs. I agree with the statement that the best levels of pollution, crime, and safety are greater than zero. For example, some of the benefits of pollution are cars, which allow is easy transportation, factories which create jobs and produce goods and services at lower costs, and electricity which lights, heats and powers our everyday lives. On the other hand, the costs of pollution can include environmental damage to the air, water, and land, which can lead to poor health and reduced outputs of fish and produce. Individuals benefit from the conveniences created by pollution, but the costs spill over to everyone who shares the environment. Crime and safety are more interlinked. People who commit crimes may benefit through looking cool (social benefits), personal gains (from the stolen goods), and through the thrill of breaking the rules. The cost of doing crime (like going to prison), contribute to the benefits of safety. When police catch these rule breakers, the general public feels safer and can therefore be more productive. Even though individuals lack total freedom, the order caused by laws makes people happier and more productive in the long run. 2. Explain why a technological improvement in the production of one good means that a country can now produce more of other goods than it did previously. Draw a country’s production possibility frontier to help answer this question. The technological improvements in production of a good means that a country can produce more of other goods because they now have more ‘resource points’ that they can distribute elsewhere. For example, in a country’s production possibility frontier (PPF), they can produce 30 fries and 20 hamburgers in one hour. If they now have 2 hours to produce goods, they can make 40 fries and 30 hamburgers.

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Karli Haugan

UCID:30098164

ECON 201, Lec 04

3. Imagine that you are overseer on a small island that only produces two goods: cattle and wheat. About a quarter of the land is not fertile enough for growing wheat, so this is where cattle are grazed. What would happen (i.e., where would you move on the production possibility frontier) if you tried to produce more and more wheat, extending you planting to less fertile soil? Support your answer with a graph. If I tried to produce more and more wheat, my production on the quarter that is not fertile would be less. I would also be unable to produce any beef, when choosing to specialize in wheat. 4. In ski resorts like Whistler, BC, hotel prices are higher in January and February (in season when there are more skiers) than in November (off-season when there are fewer skiers). Use a demand and supply diagram to explain this phenomenon. Identify this a change as either a change in the quantity supplied, quantity demanded, the demand curve, or supply curve. As the demand increases in January and February the price for skiing will increase causing a change in the quantity demanded. As the demand decreases in November the price will decrease causing a change in the quantity demanded. 5. Due to the higher price of canola, Alberta farmers chose to plant more canola in 2008 relative to previous years. Since Alberta farmers can use their land to plant any number of crops (canola, wheat, barley, oats), the increase in the price of canola had consequences also on the other crops market. Analyze what happened at the market for canola and at the market for the other crops. Use a demand and supply diagram to explain this phenomenon. Identify this a change as either a change in the quantity supplied, quantity demanded, the demand curve, or supply curve. When the demand for canola increases the price for canola will drop as the demand is met and the quantity demanded will change. When the demand for other crops decreases the price will increase as supplies run out. The quantity demanded is changing. 6. The government is considering implementing one of the two policy alternatives to reduce teen smoking: (i) impose a tax on cigarettes or (ii) implement health warnings and increase education around the ill health effects of smoking. Analyze both suggestions using a demand and supply diagram. Identify this a change as either a change in the quantity supplied, quantity demanded, the demand curve, or supply curve. i) If the price increased for cigarettes due to increased taxes the demand would decrease for the nonaddicts. This would cause a change in the quantity demanded. ii) If health warnings and education were implemented the cost for firms would increase through the cost of producing new packaging, and the quantity demanded would decrease as marginal gains would decrease since the risks are now more clearly known.

Problems 7. Suppose only taxicabs and privately-owned automobiles are allowed to use the highway between the airport and downtown. The market for taxicab service is competitive. There is a special lane for taxicabs, so taxis are always able to travel at 110 km/hour. The demand for trips by taxicabs depends on the taxi fare P, the average speed of a trip by private automobile on the highway E, and the price of gasoline G. The number of trips supplied by taxicabs will depend on the taxi fare and the price of gasoline. 2

Karli Haugan

UCID:30098164

ECON 201, Lec 04

(a) Using demand and supply diagrams, to answer the following: i. How will an increase in the price of gasoline affect the demand for transportation by taxicabs? An increase in the gas price will increase the input cost therefore the price/fare will increase shifting the supply curve left, decreasing the quantity demanded of taxi rides. ii. How will an increase in the average speed of a trip by private automobile affects the demand for transportation by taxicabs? An increase in the average speed of private vehicles would be a change in the private vehicle tech, causing a shift of the supply curve to the right, decreasing the price of private vehicles and increasing their quantity demanded while decreasing the quantity demanded for taxis. As the substitute is better. iii. How will an increase price of gasoline affects the supply of transportation by taxicabs? An increase in the price of gasoline will not change the supply of transportation by taxi cabs, because the supply curves for both taxis and private vehicles will shift left as their input prices increase. The consumers have no substitute for the change in price. (b) Suppose the demand for taxi trips is given by the equation Qd = 1000+ 50G−4E − 400P. The supply of trips by taxi is given by the equation QS = 200−30G+ 100P. On a graph draw the supply and demand curves for trips by taxi when G = 4 and E = 30 and find equilibrium taxi fare. Qd=1000+50G-4E-400P

Q s=200-30G+100P

Qd=1000+50(4)-4(30)-400P

Qs=200-30(4)+100P

Qd=1080-400P

Q s=80+100P

Q d = Qs 1080-400P=80+100P 2=P* 208=Q *

(c) Solve for the equilibrium taxi fare in a general case, that is, when you do not know G and E. How the equilibrium taxi fare changes as G and E change? Comment on your findings. As G increases the input costs increase, shifting the supply curve to the left. As E increases the technology is better, so the supply curve will shift to the right. 8. The price elasticities for cigarettes by habitual smokers (addicts) and potential smokers (young people) are -0.2 and -3 in equilibrium. The government is considering levying a new 10% tax on cigarettes. (a) For each type of consumer, calculate the expected reduction in consumption from the new tax. Explain why the responses of these two groups will differ, focusing on the determinants of elasticities. For the addicts –0.2 is the elasticity of demand and there is a 10% change in price. The change in the quantity demanded must be 2%. For the young people –3 is the elasticity of demand and there is a 10% change in price. The change in the quantity demanded must be 30%.

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Karli Haugan

UCID:30098164

ECON 201, Lec 04

The responses of the two groups differ because the young people have more substitutes than the addicts. For the addicts, cigarettes are a necessity that can’t be easily replaced, whereas the young people can choose just about anything else as a substitute. (b) From which group will the government raise more tax revenue. For each group, will tax revenue fall or rise relative to the original tax? The government will raise more tax revenue from the addicts. Tax revenue is obtained by multiplying the tax per unit by the total quantity sold. The addicts will buy more cigarettes than the young people leading to a rise in tax revenue relative to the original tax. The young people will buy less, and their tax revenue will fall compared to the original tax.

Applications 9. Please read the following article on the longer-term implications of changes in the legal market for cannabis: https://bit.ly/2kFvqjN Comment on this article using the concepts of long run supply and demand and the adjustments that occur between the short and long term in this market. The short term of the supply is unable to keep up with the demand causing an undersupply. This worries policy makers that in a few years there will be an oversupply since producers are trying to keep up with consumer demand. But as supply climbs to meet the demand the price will fall, causing the already growing number of cannabis consumers to increase and the quantity that is bought to increase. These factors should balance out the supply and demand curve in the long term. 10. Please read the following article on how some people are dealing with course wait lists at UC Berkeley: https://bit.ly/2miJ10L Comment on this article using the concepts of gains from trade. Are there any problems with this approach students are using? The opportunity cost to the students dropping the class in exchange for money is that they give up taking the class, but they gain money and can probably get into it in another semester. They may have no desire to be in that class either. This gives the people in the desirable class a comparative advantage over the people on the waitlist. There may be a problem with this approach because getting into a class can be compared to buying a desirable piece of land, building on it, and selling it again to the highest bidder. This might make students enroll in these desirable classes just to make some money, even if they do not need them.

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Karli Haugan

UCID:30098164

ECON 201, Lec 04

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Karli Haugan

UCID:30098164

ECON 201, Lec 04

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Karli Haugan

UCID:30098164

ECON 201, Lec 04

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