Question 2.

ECO 202 Assessment Problem: In this essay you will be asked to reflect the following issues using the supply and demand model.

1. There are two important inputs in the production of lattes: coffee beans and labor from workers at the coffee shop. a. Workers need to make a decision about how much time to spend working and how much time to spend doing other things. What factors affect the decision of a worker and how do these things affect the price of lattes? Rubric item 1. Demonstrate the knowledge of basic elements and concepts of microeconomics How does the following concepts affect price of lattes Microeconomic factors

1. Opportunity Cost

2. PPF with graph

3. Marginal cost and marginal benefit

4. Comparative advantage and absolute advantage

5. Price controls- price floor,

6. Explain with graph surplus in labor market if minimum wages is above equilibrium wages

7. Benefits, tuition and retirement plans

8. Consumer preferences Rubric item

2. Identify economic resources and their use

a. Natural resources

b. Human resources labor, education, skills

c. Technology

d. Entrepreneurship

b. Suppose a drought strikes the major coffee growing regions of Brazil. Describe the effect of the drought on the price and quantity of lattes in the context of the supply and demand model.

Explain with graph 1. Demand and supply, equilibrium price and output 2. Increase and decrease in demand 3. Increase and decrease in Quantity demanded 4. Increase and decrease in Supply 5. Increase and decrease in Quantity supplied 6. Explain Increase /decrease in supply of coffee beans due to drought with a graph 7. Effect on price and quantity demanded and supplied of coffee beans 8. Are coffee beans and latte complementary goods or substitutes 9. Cross price elasticity definition 10. Effect on price and quantity demanded and supplied of lattes

2. Now consider the local coffee market more broadly. Explain how the output decision made by a particular coffee shop differs under each of the four market structures: competition, monopoly, oligopoly, and monopolistic competition.

3 Differentiate production under pure competition, monopoly, oligopoly and monopolistic competition

1. Draw a graph. Label it and explain all types of costs i. Explain Law of diminishing marginal returns ii. Economies of scale iii. Short run and long run curves 2. In context of local coffee market, explain the features of pure competition, monopoly, oligopoly and monopolistic competition 3. Draw graphs of pure competition, monopoly, oligopoly and monopolistic competition and label it. 4. Discuss the output and price decision under pure competition, monopoly, oligopoly and monopolistic competition and label it.

Part B.

4. Assume that a firm's short run cost function is C(q) =100q-4q' +0.2q' +450. What is the firm's short run supply curve?? If price is p=115, how much output does the firm supply? 5. Each firm in a competitive market has a cost function of C(q) = q-q' + q . There are an unlimited number of potential firms in this market. The market demand function is given by Q=24- p . Determine the long run equilibrium price, quantity per firm, market quantity and number of firms. How do these values change is a tax of $1 per unit is collected from each firm? 6. Assume that the inverse demand function for cheese is Q=100-10p and the supply curve is Q=10p. a. [Easy] What are the effects of a specific tax of $1 per unit on the equilibrium quantity and price, government tax revenue, consumer surplus, producer surplus, welfare and DWL? b. [Harder] What are the effects of a specific subsidy (negative specific tax) of $1 per unit on the equilibrium quantity and price, government tax revenue, consumer surplus, producer surplus, welfare and DWL? c. [Hard] The government, instead of a tax or subsidy, imposes a price support (minimum price) of $6. The way this is implemented is via a deficiency payment. This means the government will guarantee producers a price of $6 and the producers choose their output accordingly. They then sell that output to consumers at whatever price consumers are willing to pay for that total output (not $6!!!). The government pays producers the difference between the $6 dollars and the price consumers are willing to pay for all units produced. This payment is called the deficiency payment. What is the quantity supplied, the price that clears the market and the deficiency payment? What effect does this program have on consumer surplus, producer surplus, welfare and deadweight loss? d. [Medium hard] Now instead of any of the policies above, the government imposes a price ceiling of $3. That is it. Price is not allowed to rise above $3. How does equilibrium change (price and quantity)? What effect does this price ceiling have on consumer surplus, producer surplus and deadweight loss?(1)(a) A company in a competitive market with a cost function C(q) = 100 + 10q- q^2 + (1/3) q^3 has learned that it will now have to face a specific tax of t = $10 (per unit). This specific tax means that for every unit of output the firm sells it has to pay a tax of t dollars. If the firm sells q units, it pays a total tax of qt. (i) What is the firm's cost function including the tax? (ii) What is this firm's short-run profit-maximizing output if the market price is p? (Hint: the solution has to be expressed as a function of p and has to be defined for values that make economic sense, e.g. only positive quantities.) (b) You are given the following information about a particular perfectly competitive industry with identical firms: Market demand: QP = 6500 - 100P Market supply: Q = 1200P Firm total cost function: C(q) = 722 + 9 200 (i) Find the equilibrium in this industry: market price, market quantity, output supplied by each firm, the profit earned by each firm, and the total number of firms. (ii) Would you expect to observe new firms entering this industry in the long run? In what direction would the market equilibrium price and quantity change? (iii) What is the lowest price at which an individual firm would choose to sell output in the long run? What is the firm's profit at this price? (Assume that the short and long run cost curves are the same) (iv) What is the lowest price at which a firm would sell output in the short run? Why? What is the firm's profit at this price?4. Consider the economy in the example on page 7 of Notes 10. There are n firms in a competitive industry. The market demand function is given by p = 50 - 2Q. A firm's cost function is C (g) = q?. In class, we have calculated the total surplus is 51 = (n41)' 50." Now consider how taxation can change the total surplus. (a) [10 points] Suppose the government imposes a per-unit far t > 0 on consumers. That is, for each unit of goods purchased, the consumer pays p + t. As a result, the market demand function becomes p + = 50 - 2Q. The tax goes to the government and firms only receive p for each unit of output sold. So the profit of a firm is pq - q?. Derive the total surplus, denoted by $2. Is Sq > Si? (b) [10 points] Instead of the per-unit tax, suppose the government imposes a pro- portional for rate + > 0 on consumers. That is, the consumer pays a after- tax price of (1 + +) p for each unit of goods, and the market demand becomes (1 + 7)p = 50-2Q. Once again, all tax revenues go to the government. Derive the total surplus, denoted by S3. Is Sa > Si?19. A firm either in monpoly or monopolistic market observes downward sloping demand curve and thus a downward sloping marginal revenue curve because to sell more they need to lower price. Total profit of any firm depends on what quantity it produces, what price it charges and what its average total cost happens to be. A firm is not there to produce more. It is there to produce that amount which maximizes profit. So a firm produces that quantity for which marginal revenue equals marginal cost. If it produces less than that, its marginal revenue is bigger. In that case, there is profit. As long as there is profit, there is not point to limit production. So it continues increasing its production. It stops where marginal revenue equals marginal cost. If it produces beyond the quantity for which MR = MC, its marginal cost will be bigger. Then it incurs loss. It won't go that territory. For pricing decision, the message from the demand curve is the help. For any quantity, the demand curve tells the maximum price buyers are willing and able to pay. The firm will charge that price for the chosen quantity. So in graph, from the chosen quantity, you go up to the demand curve. The height tells the price you can charge. For the average total cost, the average total cost (ATC), the message from the ATC curve is of help. For any quantity, the ATC curve tells the average total cost the firm incurs. So in graph, from the chosen quantity, you go up to the ATC curve. The height tells the ATC the firm incurs. Once, Q, P and ATC are known, it is very easy to calculate total revenue, total cost and total profit. Total revenue = Price x Quantity Total cost = ATC x Quantity Total profit = total revenue - total cost Refer to the above graph that pertains to a monopoly firm and answer the following questions: a. what is the profit maximizing output of the monopoly