1. Use Supply and Demand graphs to illustrate the labor market and the housing market. For each problem below provide a brief explanation and illustrate using the appropriate graph.

a. Due to the excellent work of planners and economic developers coordinating in a metropolitan area, new firms are choosing to locate in this metro. How does this impact the labor market in this location? Are equilibrium wages higher or lower than they were before the productivity shock? Will the labor market in the location be hiring more or fewer workers than before?

b. How will the changes in the labor market impact the demand for housing in your location? Use a graph to illustrate.

c. What will happen to price and the quantity of housing units if housing supply is very elastic in your location? Use a housing market graph to illustrate.

d. What will happen to price and quantity of housing units if housing supply is very inelastic? Use a housing market graph to illustrate.

e. Briefly but specifically, how might housing policy to address affordability need to differ depending on the area’s elasticity of housing supply?

2. The city of Chicago, like many municipalities, charges cars-for-hire (taxis, livery and rideshare companies) a tax each time they pick up passengers at the city’s airports (O’Hare and Midway). The tax is $4 per ride which is paid by the car before it can pick up a rider. The demand for cars-for-hire is Q=60-P and the supply of cars-for-hire is Q=3P-100.

a. What is the equilibrium quantity and price without the tax? Graph your answer.

b. What is the consumer and producer surplus at this equilibrium? Calculate and label on your graph.

c. What is the equilibrium P and Q with the tax? Label on your graph. What is the economic incidence of the tax? In other words, what proportion of the tax do consumers pay and what proportion do the drivers pay?

d. What are the consumer and producer surpluses at the equilibrium with the tax? What are the revenues from the tax?

3. A local business has asked an economic development consultant to help it decide if it can continue to compete with the other businesses in a city’s downtown area in a very competitive market. Using the firm’s historical data on their costs, the consultant finds that the total cost function for this business is TC = 12 + Q + .1Q2 where Q is amount of output this business produces. Given this TC function, we know that the marginal cost (MC) of production is P = 1+ .2Q.

a. What are the fixed costs for this business? What is the business’s variable cost function? What is the average total cost function?

b. Calculate the level of output and the price of a unit of output in long run equilibrium. Sketch a graph of your solution (you do not need to precisely graph the ATC function, you just need to include a plausible version of it).

c. Currently, the price of the product is $2.50 because of a recession that has hit the area. The consultant thinks the shop should immediately cease operations. Would you agree with this recommendation? Why or why not?

4. Consider a manufactured good whose production process generates pollution. The demand for the product is Q=120-3P. The (inverse) market supply function is P=5+.5Q. The marginal external cost is MEC=Q.

a. What is the equilibrium price and quantity in a market with no environmental policy? Graph your answer.

b. What is the socially optimal quantity of the good and the socially optimal price? Label on your graph.

c. What is the deadweight loss from the pollution damage. Label this on your graph.

d. What are the price elasticities of demand and price elasticities of supply at the unregulated market equilibrium and at the social optimum?

e. What is the emissions tax that needs to be imposed to achieve the social optimum? Add this to your graph.

f. What is the economic incidence of this emissions tax? In other words, what proportion of this corrective tax will be paid by the producers of this product and what proportion of the tax will be paid by consumers? How does your answer to this part of the question relate to your answer(s) to part d.

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nisarg1003 nisarg1003

12-05-2024
Mathematics

Answered

1. Use Supply and Demand graphs to illustrate the labor market and the housing market. For each problem below provide a brief explanation and illustrate using the appropriate graph.

a. Due to the excellent work of planners and economic developers coordinating in a metropolitan area, new firms are choosing to locate in this metro. How does this impact the labor market in this location? Are equilibrium wages higher or lower than they were before the productivity shock? Will the labor market in the location be hiring more or fewer workers than before?

b. How will the changes in the labor market impact the demand for housing in your location? Use a graph to illustrate.

c. What will happen to price and the quantity of housing units if housing supply is very elastic in your location? Use a housing market graph to illustrate.

d. What will happen to price and quantity of housing units if housing supply is very inelastic? Use a housing market graph to illustrate.

e. Briefly but specifically, how might housing policy to address affordability need to differ depending on the area’s elasticity of housing supply?

2. The city of Chicago, like many municipalities, charges cars-for-hire (taxis, livery and rideshare companies) a tax each time they pick up passengers at the city’s airports (O’Hare and Midway). The tax is $4 per ride which is paid by the car before it can pick up a rider. The demand for cars-for-hire is Q=60-P and the supply of cars-for-hire is Q=3P-100.

a. What is the equilibrium quantity and price without the tax? Graph your answer.

b. What is the consumer and producer surplus at this equilibrium? Calculate and label on your graph.

c. What is the equilibrium P and Q with the tax? Label on your graph. What is the economic incidence of the tax? In other words, what proportion of the tax do consumers pay and what proportion do the drivers pay?

d. What are the consumer and producer surpluses at the equilibrium with the tax? What are the revenues from the tax?

3. A local business has asked an economic development consultant to help it decide if it can continue to compete with the other businesses in a city’s downtown area in a very competitive market. Using the firm’s historical data on their costs, the consultant finds that the total cost function for this business is TC = 12 + Q + .1Q2 where Q is amount of output this business produces. Given this TC function, we know that the marginal cost (MC) of production is P = 1+ .2Q.

a. What are the fixed costs for this business? What is the business’s variable cost function? What is the average total cost function?

b. Calculate the level of output and the price of a unit of output in long run equilibrium. Sketch a graph of your solution (you do not need to precisely graph the ATC function, you just need to include a plausible version of it).

c. Currently, the price of the product is $2.50 because of a recession that has hit the area. The consultant thinks the shop should immediately cease operations. Would you agree with this recommendation? Why or why not?

4. Consider a manufactured good whose production process generates pollution. The demand for the product is Q=120-3P. The (inverse) market supply function is P=5+.5Q. The marginal external cost is MEC=Q.

a. What is the equilibrium price and quantity in a market with no environmental policy? Graph your answer.

b. What is the socially optimal quantity of the good and the socially optimal price? Label on your graph.

c. What is the deadweight loss from the pollution damage. Label this on your graph.

d. What are the price elasticities of demand and price elasticities of supply at the unregulated market equilibrium and at the social optimum?

e. What is the emissions tax that needs to be imposed to achieve the social optimum? Add this to your graph.

f. What is the economic incidence of this emissions tax? In other words, what proportion of this corrective tax will be paid by the producers of this product and what proportion of the tax will be paid by consumers? How does your answer to this part of the question relate to your answer(s) to part d.

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