Calculate and illustrate the weekly value of a unit of quota


Assignment #2 2018/2019

Due Dates and Notes:

 DUE: By Monday October 29, 2:00 PM. Completed assignments should be placed in the slot marked

for your section in the white assignment collection box on the 2 nd

floor of Dunning Hall. Late

assignments will not be accepted.

 Use the Cover Page when submitting assignments (download from the Assignments page on onQ).

Place diagrams for particular questions with your answers to those questions (not all at the end).

 Group Work: Maximum four per group, all students must be registered in the same class. Names (as

they appear on onQ) must be in alphabetical order on the cover page (last names first).

 Graded work will be available for pick-up beginning on Monday November 12 in the Econ Distribution

Center, Dunning Hall Room 334. You will require your student card.

 This assignment covers material from Chapters 4-6 of the text.

True, False, or Uncertain [48 marks – 6 marks each]

Explain why each of the following statements is True, False, or Uncertain according to economic

principles. Use diagrams where appropriate. Unsupported answers will receive no marks. It is the

explanation that is important.

A2-1. It has been reported that recent changes to US tariff policy have increased the price of washing machines in

the US by 15%. If this is true, then US consumers will spend more on washing machines.

A2-2. A binding minimum wage makes everyone affected by it better off

A2-3. Since in most European countries goods are sold to consumers at a price that includes their version of the

HST, rather than being charged the tax at the cash register, we can be sure that European consumers do

not bear the burden of the tax. [Hint: Assume that the tax is a “per unit” sales tax and that supply curves

are somewhat elastic.]

A2-4. If the pre-tax (inverted) supply and demand curves for a good are given by P = 10 + 2Q and P = 100 – Q

respectively, then a $30 per unit tax is shared equally between producers and consumers.

A2-5. A household is currently consuming a bundle of goods X and Y such that MUX/pX = 2 and MUY/pY = 1.

The household can increase its “utility” by consuming less X and more Y.

A2-6. A rational consumer’s indifference curves cannot intersect. [Hint: Two of the assumptions about

preferences are that they are transitive over consumption bundles, and that consumption bundles with

more of at least one good and no less of the other are preferred.]

A2-7. If a household’s income and all the prices it faces increase by 5% it will consume more of those goods it

considers to be normal and fewer of those goods it considers to be inferior.

A2-8. When the price a good decreases, purchasers gain consumer surplus only on the newly purchased units of the good.

Problems [52 marks – marks for each part as shown]

A2-9. Suppose that the weekly market for taxi trips in a small town is characterized by the following equations, .

where Q is the quantity of trips in thousands and P is the price per trip.

Demand: P = 20 – Q Supply: P = 5

(a) Graph the supply and demand curves. Be sure to calculate the P and Q intercepts for demand and

the P intercept for supply. Calculate and illustrate the equilibrium price and quantity. [4]

(b) How much is spent on taxi trips each week? Calculate and illustrate the economic surplus generated

in this market. [Remember that the quantity is given in thousands of trips.] [4]

(c) Calculate the price elasticity of demand at the equilibrium point. [2]

(d) Suppose the local government restricts the quantity of trips by issuing 10 thousand units of quota

each allowing for a legal trip per week. What is the impact on the price and quantity in the market?

Illustrate in your diagram. [3]

(e) How much is spent on taxi trips each week with the quota policy in place? Calculate and illustrate

the deadweight loss from the policy. Who is made better off or worse off under the policy? [5]

(f) Calculate and illustrate the weekly value of a unit of quota (the right to legally sell a trip during the

week). What is the total weekly value of all of the available units of quota? [3]

(g) Now suppose that a ride-hailing firm (like Uber or Lyft) enters the city and the result is a change in

demand for taxi rides to: P = 15 – Q. If the local government maintains its quota system and allows

the price of taxi trip to adjust, what happens to the price and quantity of trips? What happens to the

value of a unit of quota? [5]

(h) Suppose instead that the local government responds by leaving the quota system intact, but fixes the

price that previously existed under the policy. What are the price and quantity of rides under this

scenario? If all the existing quota holders stay in the market but only serve riders equal to the

percentage of the total, what is the value of a unit of quota? [4]

A2-11. Suppose a consumer has $120/week to spend on two consumer goods, good x and good y.

(a) Illustrate the budget lines (with x on the horizontal and y on the vertical axis) of two price scenarios.

In scenario 1 the price of x is $1 and the price of y is $2. In scenario 2 the price of x is $2 and the

price of y is $1. Under each scenario, what is the relative price (opportunity cost) of a unit of x? [4]

(b) Suppose that under scenario 1 the consumer would choose 80 units of x, while under scenario 2 the

consumer would choose to consume 20 units of x. Under each scenario how much y would be

consumed? If we assume that the consumer is indifferent between the two scenarios, illustrate the

choices with an indifference curve. [4]

(c) Assume that the consumer was originally faced with price scenario 1. Now suppose that the price of

x rises to $4 and the consumer chooses 15 units of x. How many units of y would be chosen? What is

the new relative price of x? Illustrate this new choice with an indifference curve. Can you tell from

previous results how the consumer thinks of the two goods in terms of normal/inferior? [Hint: Think

about and explain the substitution and income effects.] [6]

(d) Given the information from part (c), can you determine whether the consumer’s demand curve for

good x is elastic or inelastic? [Hint: There are two ways to determine the answer.] [4]

(e) Following on from part (c), suppose that the consumer’s income now increases to 360. Given what

you know about the consumer’s preferences, can you predict a possible equilibrium on the new

budget line? [4]

The material in this assignment is copyrighted and is for the sole use of students registered in Economics 110, 111 and 112. The material in this assignment may be downloaded for a registered student’s personal use, but shall not be distributed or disseminated to anyone other than students registered in Economics 110, 111 and 112. Failure to abide by these conditions is a breach of copyright, and may also constitute a breach of academic integrity under the University Senate’s Academic Integrity Policy Statement.

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