Assignment 2
Please submit your answers properly labeled, in order, in one Word document.
1. a. Using the data from Assignment 1 (also shown in the table below), calculate the elasticity of demand and elasticity of supply at each price change in the market for movie tickets using the midpoint formula for both supply and demand. (3 marks)
Price
Quantity Demanded
Elasticity of Demand
Quantity Supplied
Elasticity of Supply
$5
350,000
10,000
$8
250,000
20,000
$10
150,000
50,000
$13
125,000
85,000
$15
110,000
110,000
$18
80,000
150,000
$20
45,000
300,000
$25
25,000
350,000
b. Based on your elasticity calculation, if the price of movie tickets rises from $13 to $15 will total revenue go up or down? By how much? You need to answer the first part of this question using the elasticity of demand at this point. (2 marks)
2. Define the following terms and provide a new example of each (not the one in the textbook). (2 marks)
a. Deadweight losses
b. Free-rider problem
3. Data on two individuals’ preferences for a public good are reflected in the table below. PA and PB represent the prices individuals A and B, the only two people in the society, are willing to pay for an extra unit of a public good, rather than do without.
Quantity
PA
PB
2
$12
$11
3
10
9
4
8
7
5
6
5
6
4
3
2
7
2
1
(a) Complete the table below showing the collective willingness to pay for the public good in this society. (1 mark)
Qd
Collective Price
Qs
2
8
3
7
4
6
5
5
6
4
7
3
(b) Given the supply schedule for this public good as shown by the Qs column, what is the optimal quantity of this public good and what is the optimal price? (1 mark)
(c) What is the perceived marginal benefit and perceived marginal cost when 4 units of the public good are supplied? What does this indicate about the allocation of resources to this public good? That is, are the resources under-allocated or over-allocated? (1 mark)
Please submit your answers properly labeled, in order, in one Word document.
1. a. Using the data from Assignment 1 (also shown in the table below), calculate the elasticity of demand and elasticity of supply at each price change in the market for movie tickets using the midpoint formula for both supply and demand. (3 marks)
Price
Quantity Demanded
Elasticity of Demand
Quantity Supplied
Elasticity of Supply
$5
350,000
10,000
$8
250,000
20,000
$10
150,000
50,000
$13
125,000
85,000
$15
110,000
110,000
$18
80,000
150,000
$20
45,000
300,000
$25
25,000
350,000
b. Based on your elasticity calculation, if the price of movie tickets rises from $13 to $15 will total revenue go up or down? By how much? You need to answer the first part of this question using the elasticity of demand at this point. (2 marks)
2. Define the following terms and provide a new example of each (not the one in the textbook). (2 marks)
a. Deadweight losses
b. Free-rider problem
3. Data on two individuals’ preferences for a public good are reflected in the table below. PA and PB represent the prices individuals A and B, the only two people in the society, are willing to pay for an extra unit of a public good, rather than do without.
Quantity
PA
PB
2
$12
$11
3
10
9
4
8
7
5
6
5
6
4
3
2
7
2
1
(a) Complete the table below showing the collective willingness to pay for the public good in this society. (1 mark)
Qd
Collective Price
Qs
2
8
3
7
4
6
5
5
6
4
7
3
(b) Given the supply schedule for this public good as shown by the Qs column, what is the optimal quantity of this public good and what is the optimal price? (1 mark)
(c) What is the perceived marginal benefit and perceived marginal cost when 4 units of the public good are supplied? What does this indicate about the allocation of resources to this public good? That is, are the resources under-allocated or over-allocated? (1 mark)
Instructions
1. Complete the exercises below, answering all questions. In this exercise you are trying to maximize profits (or minimize losses). Don’t forget to answer the questions as well as create the table.
2. Submit the assignment in a WORD document using the Assignment Submission feature. Assignments not submitted as a Word document will not be accepted. Assignments submitted in Excel will be returned unmarked. Assignments that are emailed will not be accepted.
A company produces decorated wooden storage boxes. The cost per box is:
Wood and glue $20
Decorative paint $ 4
Hardware $ 7
The artist who creates the designs on the boxes is paid $8,000 annually. Other annual costs are:
Taxes and Insurance $12,600
Utilities $1500
Rent $23,000
Miscellaneous Overhead Expenses $18,400
Each worker costs $32,000 per annum in salary and benefits.
The following production is possible:
# of Workers
0
1
2
3
4
5
6
7
# of Boxes that can be made
0
700
1325
2400
3500
4350
4900
4200
1. Using all this information complete the following table and answer the questions. It would be easier if you set this up in an Excel spreadsheet. When you are done, you must submit it as a Word document with your answers. You will use this table to answer questions 2 and 3. (4 marks)
Your first step is to identify which are fixed costs and which are variable costs. If you will have to keep paying the cost whether you produce 0 units of the product or 10,000 units, then it is a fixed cost. In the short run you have to keep paying it. In the long run you may be able to change these fixed costs. A variable cost changes based on how much of the product you produce. But the variable costs may not change all at the same time.
# of workers
Q
TVC
AVC
AFC
TC
ATC
TVC / Q
FC / Q
FC + VC
TC/Q
0
0
1
700
2
1325
3
2400
4
3500
5
4350
6
4900
7
4200
MC
?TC / ?Q
2. What is the lowest price you would be willing to start producing this new product? (1 mark)
3. If you were already committed to the fixed costs, how low could the price per storage box fall before you would consider shutting down production? Remember you have to keep paying your fixed costs whether you produce any boxes or not. If you can cover your variable costs, then anything over that will reduce your fixed costs. You may be losing money in the short run but you are losing less money. (1 mark)
4. If the price per box were fixed at $200, what would you do? Remember, in the short run you can’t alter fixed costs, you can just decide where to set the level of production. Your costs, # of workers, and quantities are the same as you have already calculated, so when filling in these tables for Q 4, 5, 6 and 7, use the same costs. You just need to calculate total revenue and profit or loss as you are given the average revenue. Remember to state what level of production you would choose. (1 mark)
# of Workers
PxQ
price
FC + VC
Profit or Loss
TR
AR
Q
TC
TP
0
1
2
3
4
5
6
7
5. If the price per storage box were fixed at $80, what would you do? Again, remember that you have to keep paying your fixed costs in the short run. (1 mark)
# of Workers
PxQ
price
FC + VC
Profit or Loss
TR
AR
Q
TC
TP
0
1
2
3
4
5
6
7
6. If the price per storage box were fixed at $50, what would you do? (1 mark)
7. If marketing data showed you could sell the following number of storage boxes at the prices indicated, how many boxes would you produce and what would be your profit? (1 mark)
# of Workers
PxQ
price
FC + VC
Profit or Loss
TR
AR
Q
TC
TP
0
1
2
3
4
5
6
7
# of boxes
700
1325
2400
3500
4350
4900
Price (AR)
$350
$250
$200
$175
$125
$100
# of Workers
TR
AR
Q
TC
Profit or Loss (TP)
0
1
2
3
4
5
6
7
Evaluation
This assignment is worth 10% your final grade. See the Critical Path for due date.
Please allow one week after due date for this assignment to be marked and returned to you, and/or your grade to be posted in the My Grades section.
Submission Requirements
Name your file your_name_assign3.doc (substitute your name)
Unless instructed otherwise, use Add Attachments in the Assignment Tool of Blackboard to send your assignment to your instructor.
FOR MORE INFORMATION ON THIS TOPIC CLICK HERE
1. Complete the exercises below, answering all questions. In this exercise you are trying to maximize profits (or minimize losses). Don’t forget to answer the questions as well as create the table.
2. Submit the assignment in a WORD document using the Assignment Submission feature. Assignments not submitted as a Word document will not be accepted. Assignments submitted in Excel will be returned unmarked. Assignments that are emailed will not be accepted.
A company produces decorated wooden storage boxes. The cost per box is:
Wood and glue $20
Decorative paint $ 4
Hardware $ 7
The artist who creates the designs on the boxes is paid $8,000 annually. Other annual costs are:
Taxes and Insurance $12,600
Utilities $1500
Rent $23,000
Miscellaneous Overhead Expenses $18,400
Each worker costs $32,000 per annum in salary and benefits.
The following production is possible:
# of Workers
0
1
2
3
4
5
6
7
# of Boxes that can be made
0
700
1325
2400
3500
4350
4900
4200
1. Using all this information complete the following table and answer the questions. It would be easier if you set this up in an Excel spreadsheet. When you are done, you must submit it as a Word document with your answers. You will use this table to answer questions 2 and 3. (4 marks)
Your first step is to identify which are fixed costs and which are variable costs. If you will have to keep paying the cost whether you produce 0 units of the product or 10,000 units, then it is a fixed cost. In the short run you have to keep paying it. In the long run you may be able to change these fixed costs. A variable cost changes based on how much of the product you produce. But the variable costs may not change all at the same time.
# of workers
Q
TVC
AVC
AFC
TC
ATC
TVC / Q
FC / Q
FC + VC
TC/Q
0
0
1
700
2
1325
3
2400
4
3500
5
4350
6
4900
7
4200
MC
?TC / ?Q
2. What is the lowest price you would be willing to start producing this new product? (1 mark)
3. If you were already committed to the fixed costs, how low could the price per storage box fall before you would consider shutting down production? Remember you have to keep paying your fixed costs whether you produce any boxes or not. If you can cover your variable costs, then anything over that will reduce your fixed costs. You may be losing money in the short run but you are losing less money. (1 mark)
4. If the price per box were fixed at $200, what would you do? Remember, in the short run you can’t alter fixed costs, you can just decide where to set the level of production. Your costs, # of workers, and quantities are the same as you have already calculated, so when filling in these tables for Q 4, 5, 6 and 7, use the same costs. You just need to calculate total revenue and profit or loss as you are given the average revenue. Remember to state what level of production you would choose. (1 mark)
# of Workers
PxQ
price
FC + VC
Profit or Loss
TR
AR
Q
TC
TP
0
1
2
3
4
5
6
7
5. If the price per storage box were fixed at $80, what would you do? Again, remember that you have to keep paying your fixed costs in the short run. (1 mark)
# of Workers
PxQ
price
FC + VC
Profit or Loss
TR
AR
Q
TC
TP
0
1
2
3
4
5
6
7
6. If the price per storage box were fixed at $50, what would you do? (1 mark)
7. If marketing data showed you could sell the following number of storage boxes at the prices indicated, how many boxes would you produce and what would be your profit? (1 mark)
# of Workers
PxQ
price
FC + VC
Profit or Loss
TR
AR
Q
TC
TP
0
1
2
3
4
5
6
7
# of boxes
700
1325
2400
3500
4350
4900
Price (AR)
$350
$250
$200
$175
$125
$100
# of Workers
TR
AR
Q
TC
Profit or Loss (TP)
0
1
2
3
4
5
6
7
Evaluation
This assignment is worth 10% your final grade. See the Critical Path for due date.
Please allow one week after due date for this assignment to be marked and returned to you, and/or your grade to be posted in the My Grades section.
Submission Requirements
Name your file your_name_assign3.doc (substitute your name)
Unless instructed otherwise, use Add Attachments in the Assignment Tool of Blackboard to send your assignment to your instructor.
FOR MORE INFORMATION ON THIS TOPIC CLICK HERE
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