Assignment:
Question 1. The diagram below shows the market for cups of latte. The current equilibrium price is $4 per latte and every month 40 million latte are sold.
a. Calculate the value of Consumer and Producer Surplus.
b. Suppose the government decided to introduce an excise of $2 per cup which increases the price to $5 per cup and reduces consumption to 30 million cups.
i. Calculate the new level of consumer and produce surplus.
ii. Calculate the deadweight loss.
iii. Calculate the tax revenue collected resulting from the tax.
Question 2. Use the supply and demand equations below to answer the following questions:
QS = 2,000P - 10,000 (or P = 5 + 1/2000 QS)
QD = 20,000 - 1,000P (or P = 20 -1/1000 QD)
(Show all calculations)
a. Solve for the equilibrium price and quantity in the market.
b. Illustrate these curves on a graph, labelling the curves, intercepts and equilibrium price and quantity.
c. Suppose a price floor is set at P = $12 per unit, what is the new quantity demanded and supplied? Because of the price floor, what is the amount of the shortage or surplus in the market?
d. On your diagram, show the price floor, identify the area representing the deadweight loss imposed on society and identify the share of consumer surplus transferred to producers.
Question 3. Colmownsa hot dog vending cart which he rents out each summer for $1,000. He has a summer job offer for $800 per week for 10 weeks but has decided instead to operate the hot dog cart himself on the Halifax Waterfront for 10 weeks during summer.
He paid the City $500 for a license to operate the business and has rented storage at $600 for the duration of his 10-week business. Both payments were made in advance and are non-refundable.
After three weeks of operation his revenue is averaging $1,000 per week (or an expected $10,000 for the summer).
His expenditures for supplies (fuel, napkins, hot dogs, buns, etc.) are averaging $120 per week (or an expected $1,200 for the summer)
a. For 10 weeks of operationcalculate Colm's expected explicit costs and accounting profit?
b. What are his implicit costs and economic profit?
c. If costs and revenue are anticipated to be the same in 2019 as they are this year, would you expect Colm to operate this business again next summer? Briefly explain your reasoning. 2019? Explain.
Question 4. Stefanie's enjoys pizza and going to the movies. The price of a pizza and a movie are both $10 each. For her current consumption of movies and pizza, she values one more movie twice as much as she values one more pizza.
a. Is Stefanie's currently choosing her optimal consumption combination? Explain.
b. What should Stefanie do to maximize utility? Explain.