A few extra problems for the final exam review ECNS204 Fall 2012 1.) The elasticity of demand for Black Diamond Cobra ice axes is -1.1. a.) If the quantity demanded is 500 per year when the price is $400 per set of ice axes, then how many sets of ice axes will be demanded at a price of $350? b.) Suppose three companies that also sell ice axes go out of business (Grivel, Cassin, and Petzl). What will likely happen to the elasticity of demand for Black Diamond Cobra ice axes? 2.) Dave and Mary have the following marginal value schedules for peaches. Dave has an initial endowment of 4 peaches and Mary has an initial endowment of 2 peaches. How many peaches will be exchanged and what are the gains from trade? Q MV(Dave) MV(Mary) 1 9 10 2 8 7 3 7 5 4 6 3 5 5 1 6 4 0 7 3 0 8 2 0 3.) Suppose Tim earns $10/hour at his job. Also suppose the government has imposed an income tax of 20% and that Tim has decided to work 6 hours per day under this tax scheme. a.) Draw a graph with two budget constraints for Tim. One under the assumption of no tax and the other under the income tax scheme described above. Also draw the indifference curve that shows Tim’s optimum leisure/income combo under the income tax scenario. Make sure to label your graph. This includes the points of intersection between the budget constraints and the vertical and horizontal axes and the point of tangency between the IC and budget constraint. b.) Now suppose the government instead has decided to impose a head tax of $12/day. Which tax regime does Tim prefer? Support your answer with a graphical analysis. 4.) Suppose the demand for good X is perfectly inelastic. Now, suppose the government has imposed a per unit sales tax on good X that the seller is responsible for paying. Who bears the burden of this tax? Support your answer with a graphical analysis. 5.) The average smoker spends a very small portion of his/her yearly income on cigarettes. In an attempt to promote healthier living styles the government imposes a tax of $1/pack on cigarettes and claims that it shouldn’t impact smokers’ welfare that much because their expenditures on cigarettes are very small when compared to the amount they spend on all other goods. Evaluate this statement (hint: it is wrong). 6.) Next winter, the Department of the Interior is planning on using taxpayer funds to plow the road up to Hyalite canyon twice a month. This plan is partially directed at the request of the ice climbing community and it is estimated that this will cost taxpayers $100,000. Draw a demand curve for ice climbing at Hyalite canyon that would be consistent with the argument that consumers as a whole are better off with this plan going through. 7.) Consider a steel company that pollutes a river. Downstream from the steel company is a popular recreation spot that is privately owned. Here, recreationists pay the owner to partake in such activities as boating, fishing, etc. The owner of the recreation area suffers damages when the steel company pollutes the river. The MC schedule for the steel company of producing tons of steel is given below in the second column. Also, each ton produced causes $50 worth of damage downstream. The price the steel company receives for a ton of steel on the marketplace is $300. Q(tons) Pvt. MC Marginal damage to recreation area owner 1 100 50 2 150 50 3 200 50 4 250 50 5 300 50 6 350 50 a.) When property rights are not perfectly delineated (i.e. poorly defined), how many tons of steel are produced? b.) Assume zero transaction costs and that the recreation area owner has the right to zero pollution. What is the outcome? How does this outcome come about? Is it efficient? c.) Answer part b.) again, but now assume the steel company has the right to pollute (again, assume transaction costs are zero). 8.) Solve for the Nash Equilibrium in the following game (the first value in each cell is for Player 1; the second value in each cell is for Player2) Player 2 Left Right Top 10,10 6,8 Player 1 Middle 7,7 13,10 Bottom 3,11 9,9 9.) The elasticity of demand for meals consumed at restaurants is estimated to be -2. Suppose the City of Seattle enacts a flat tax of $3.00 per restaurant meal per customer for all restaurants in the city limits. a.) what will happen to the average quality of food served in restaurants? b.) Under what circumstance would the price of meals at restaurants rise by the full $3.00? (hint: the answer has something to do with the supply and/or demand curves) c.) Assuming the price does rise by $3.00 over the previous price, by what percentage will the quantity of meals consumed at restaurants that formerly served $10 meals fall by? d.) If you owned Jenna’s Steak house which sells steak meals for approximately $60 to $80, would you likely be in favor of this new tax or oppose it? (hint: consider why the answer may be ambiguous) 10.) Suppose we have a 2-person trade economy. Colin and Steve can each produce one of two items or a combo of both. In a full day, Colin can make 3 ice axes or 9 climbing ropes; in the same time, Steve can make 4 ice axes or 4 climbing ropes. When left to their own devices, Colin produces 1 ice axe and 6 climbing ropes, and Steve produces 3 ice axes and 1 climbing rope. a.) Does either Colin or Steve have an absolute advantage in production? b.) If they specialize, what are the gains in production to this 2-person economy. In addition to calculating the gains from specializing and trading, illustrate graphically. 11.) Suppose that the only two goods you purchase are X and Y. One day the price of X goes down a.) Illustrate your old and new budget lines. b.) Illustrate the substitution and income effects on your consumption of X. c.) What is the direction of the substitution effect? Why? d.) If X is a normal good, what is the direction of the income effect? Why? e.) If X is an inferior good, what is the direction of the income effect? Why? .