CP 6031 Assignment 2

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Georgia Institute Of Technology *

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6031

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Economics

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Feb 20, 2024

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docx

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qwCP 6031 - Spring 2024 Assignment #2 Due 2/15/2023 @ 8:00pm There are 8 graded questions worth 50 points in total. You may work together, but if you do you must write the names of the individuals you worked with at the top of your assignment. Provide complete, thoughtful answers for full credit. You may earn partial credit if you show your work. You may upload your answers to Canvas in any way you prefer but if you write by hand and scan, please make sure your writing is legible. Genius Scan is a free app that works well for scanning and creating PDFs. Check your scans, though. Paper copies not accepted. 1. Suppose you are given the following information about a particular industry: Assume that all firms are identical and that the market is characterized by perfect competition. You have not seen the last two equations (MC and C) before, but you are fully capable of applying them as I outline below. a) Find the equilibrium price (P) and the equilibrium quantity (Q) (2 points) EP= QD – QS EQ= QS-1200P 1200P * 5 = 6000 6500-100P = 1200P 6500/ 1300P = 5 The equilibrium price is 5 and the equilibrium quantity is 6000. b) Find the output (q) supplied by the firm. Remember, at the profit maximizing production choice, firms’ marginal cost equals marginal revenue. We did not cover this, but it turns out that at this point, MR=MC=Price as well. (1 point) P= MC (q) 5 – 200/2q q-500 Output supplied by the firm is 500. 1
c) Calculate total profit for the firm ( ). Recall, you were given the profit function in class. (1 points) Profit= P * Q – TC 5 * 500 – 722 + 500^2/200 2500 - (722 + 1250) 2500 - 1972 =528 The firm ends $528 in profit. 2. Suppose the supply curve for a good is completely inelastic. If the government imposed a price ceiling below the market-clearing (i.e., competitive market) level, would a deadweight loss result? Explain why and what the means in plain English. (4 points) This would not result in deadweight loss as the supply curve is completely inelastic, meaning the market-clearing quantity supplied and price ceiling quantity supplied are the same. Therefore, imposing a price ceiling transfers the loss in the producer surplus to the consumer and no deadweight loss would result. 3. In 2022, Portland, Oregonians consumed (rode for) 20 million hours of electric scooters. They paid an average price of $25.00 per hour. a. Given that the elasticity of supply is 0.5 and the elasticity of demand is -0.7, derive linear demand and supply curves for electric scooters. (Remember, we did this toward the beginning of the semester). (4 points) Q= a + bP -0.7 = 25/20 Change Q / change P Change Q/ change P = -0.70(20/25) = -0.56 = b 20= a -0.56 * 25 = 34 = a QD= 34M – 0.56M*P 0.5 = 25/20 Change Q / change P Change Q/ change P = 0.5(20/25) = 0.4 20= c + 0.4 * 25 = 10 QS = 10M + 0.4M*P b. The local planning board is considering strategies to limit externalities caused by electric scooters and propose a local tax of $3.00 per hour. What does this tax do to the market-clearing price and quantity? Show graphically and describe. (3 points) 2
Qs= 10 + 0.4P 10 + 0.4 (P-3) 10 + 0.4P- 1.2 8.8 + 0.4P Qs- QD 8.8 + 0.4P – 34 – 0.56P 0.4P + 0.56P – 34 – 8.8 0.96P- 25.2 P= 25.2/0.96= $26.25 $26.25-$3= $23.25 QD= 34- 0.56 (26.25) 34-14.7 =19.3 (M) The tax would have a differing effect on consumer and producer prices per hour. The price for the consumer would be $26.25 and the price for the producer would be $23.25. The tax would also impact the quantity which would decrease from 20 million hours of usage to 19.3. 4. (Short answer: 200-400 words) Open and read the accompanying PDF article from the Atlantic by James Kwak. Then, first explain the predicted welfare effects of setting a minimum wage as we discussed in class, using plain English. Next, use the Kwak article to make an argument against the predictions of this simple model. (10 points) When we analyze the impact of implementing a minimum wage solely through the lens of supply and demand, it appears that the quantity demanded falls short of the quantity supplied, indicating a market inefficiency. However, this observation alone doesn't determine whether the policy is beneficial or detrimental. Various other factors must be considered, particularly when evaluating the setting of a minimum wage. The argument often made against implementing a minimum wage suggests that it leads to reduced employment opportunities, as employers may hire fewer workers to compensate for increased labor costs. Nevertheless, recent research challenges the simplistic assumptions of the supply and demand model. Historical examples, such as the period between 1967 and 1969 when the minimum wage was relatively high and unemployment remained low, indicate that real-world outcomes can diverge from theoretical predictions. Additionally, many businesses, especially small firms, lack the financial means to invest in labor-replacing technologies, as suggested by some critical of implementing a minimum wage. Consequently, even if smaller firms desired to lay off workers due to increased wages, they may not have viable alternatives. Moreover, raising the minimum wage can have several positive effects. Higher wages incentivize individuals to work more, reduce employee turnover rates, and increase disposable income, consequently stimulating economic activity. Furthermore, it lifts many workers above the poverty line, lessening their reliance on government assistance and 3
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