Homework assignment #2 for Micro: (40 Points Total)

1. In 2020 due to state deregulations ridesharing company X managed to lower its price which led to higher quantity demanded of their rides (a movement along the demand curve). The accompanying table describes what happened to prices and the quantity demanded of their service. Using the midpoint method, calculate the price elasticity of demand for the rides. (4 points)

2008 2012
Quantity demanded (rides) 130 million 420 million
Average price (per ride) $25 $15

2. What can you conclude about the price elasticity of demand in each of the following statements? (3 points each =6 points)

a. A local coffee shop noticed that when they raised their prices by 30%, their sales dropped by 15%. What does this indicate about the elasticity of demand for their coffee?

b. A recent government legislation brought price of lifesaving drug X down by more than 300%, yet there was no change in quantity demanded of the said drug.

3. Use price elasticity of demand concept to explain each of the following observations: Say how elastic the demand is for products mentioned in each question. (4 points each = 8 total)

a. A business notices that its total revenue remains unchanged when it raises prices. What can be concluded about the elasticity of demand for its product?

b. To increase funding for public services, the city of “Greenville” imposes a $10 tax on consumers purchasing product Y, which is currently priced at $30. Despite this tax, the sellers of product Y do not raise their prices, absorbing the entire tax burden. What does this suggest about the price elasticity of demand for product Y?

4. You operate a company that produces good X. Your fixed cost is $8,000 per month. You can hire workers for $7,000 per worker per month. Your monthly production function for good X is as given in the accompanying table. (13 points total)

Quantity of workers Quantity of good X AVC AFC ATC TC MC
0 0 N/A N/A N/A N/A
1 550
2 1,420
3 1,880
4 2,200
5 2,400

a. For each quantity of labor, calculate average variable cost (AVC), average fixed cost (AFC), average total cost (ATC), and marginal cost (MC). (0.28 for each correct answer =7)

b. On the diagram below (or your own diagram), draw the AVC, ATC, and MC curves. (4 points)

c. At what level of output is your average total cost (ATC) minimized? (2 points)

5. Product X’s market demand and supply is shown in graph below. Initial market equilibrium price for good X is at $8 (Equilibrium A). Local government decides to impose an excise tax on demanders of good X resulting demand curve to shift down from “Demand” to “Demand after tax”. Use the graph to answer the following questions.
(9 points)

a) What is the dollar value of the excise tax per unit on good X? $_______ (1 point)

b) What price do buyers end up paying after the excise tax has been imposed? $ _____
(2 points)

c) What price do sellers keep (not receive) after paying the excise tax to the local government? $_______________ (2 points)

d) What share of the excise tax per unit of X do buyers end up paying? $______________ (2 points)

e) What share of the excise tax per unit of X do sellers end up paying? $_______________ (2 points)