Econ 300- Second Graded Problem Set

Econ 300- Second Graded Problem Set Spring 2004-Eric Jacobson Due: Thursday, April 15

Instructions: Please answer all of the following questions. Responses should be typed or written very neatly in pencil. Take the time to draw neat and carefully labeled (color) graphs. (But don’t use red, which is reserved for grading.) We will go over selected answers immediately before problem sets are collected. You will be asked to make corrections as we go over answers, but any corrections and changes made in class must be made in RED INK.

All problem sets should be prepared neatly and professionally. Papers should be stapled and should contain the following information on the right-hand corner of the page: your name, my name, course number, assignment identification, e.g., chapter number(s), and date/ Papers that are sloppy, torn from spiral-bound notebooks, or which are illegible, or unstapled, will be graded down.

Each problem set is graded on a five-point scale based upon the apparent effort applied and the accuracy of the responses:

Completed full assignment with over 80% accuracy…………………………………….5 points Completed full assignment with 65% to 80% accuracy………………………………….4 points Over 75% completed assignment with 50% to 65% accuracy…………………………...3 points Between 50% and 75% completed assignment…………………………………………..2 points Less than 50% completed…………………………………………………………………1/2 point Failure to submit assignment when collected…………………………………………….0 points

Problems:

1. Consider the market for rubber bands. a. If this market has a very elastic supply and a very inelastic demand, how would the burden of a tax on rubber bands be shared between consumers and producers? Use table and graph measuring consumer surplus and producer surplus similar to the one developed in class. b. If this market has very inelastic supply and very elastic demand, how would the burden of a tax on rubber bands be shared between consumers and producers? Contrast your answer with your answer to part (a.) 2. Suppose the government imposes a tax on heating oil. Explain using graphs a. Would the deadweight loss from this tax likely be greater in the first year after it is imposed or in the fifth year? b. Would the revenue collected from this tax be greater in the first year after it is imposed or in the fifth year? 3. Answer the following problem using Example 4.2, the effects of a Gasoline Tax, handed out in class, as a guide. Suppose the income elasticity of demand for food is +0.5 and the price elasticity of demand -1.0. a. If a new sales tax on food were to cause the price of food to double, what would happen to Felicia’s consumption of food? What economic information would you need to solve this problem? b. Suppose that she is given a tax rebate of $5,000 to ease that effect of the tax. What would happen to her consumption of food? What economic information would you need to solve this problem? c. Draw the graph illustrating parts (a) and (b). d. Do you think she is better of worse off when given a rebate equal to the sales tax payments? Explain demonstrating your growing knowledge of intermediate microeconomics. 4. Wheat is produced according to the production function Q=100(K^.8*L^.2). a. Beginning with a capital input of 4 and a labor input of 49, show that the marginal product of labor and the marginal product of capital are both decreasing. b. Does this production function exhibit increasing, decreasing, or constant returns to scale? 5. Chapter 9, Problem 10 6. Assumer a computer firm’s marginal costs of production are constant at $1000 per computer. However, the fixed costs of production are equal to $10,000 a. Calculate the firm’s average variable cost and average total cost curves b. If the firm wanted to minimize the average total cost of production, would it choose to be very large or very small? Explain. c. Suppose a firm must pay an annual franchise fee or tax, which is a fixed sum, independent of whether it produces any output. How does this tax affect the firm’s fixed, marginal and average costs? d. Now suppose the firm is charged a tax that is proportional to the number of items it produces. Again, how does this tax affect the firm’s fixed, marginal and average costs? 7. How does an increase in the price of a fixed cost change a firm’s long run and short run expansion paths? Illustrate Graphically. 8. Chapter 10, Problem 2 9. Chapter 10, Problem 8 10. Suppose that you are the manager of a watch making firm operating in a competitive market. Your cost of production is given by C=100+Q^2, where Q is the level of output and C is the total cost. The marginal cost of production is 2Q. The fixed cost of production is $100. a. If the price of watches is $60, how many watches should you produce to maximize profits? b. What will your profit level be? c. At what minimum price will you produce a positive output?

Good luck and please remember to bring a red pen with you on Thursday, April 15.