Short Answer 1. Molly has been running her restaurant for dinner only for a year now. She has thought about opening up for lunch, but so far has not done so. In particular, she is concerned that most people in the area buy lunch from one of the many food trucks that park every day in a parking lot across the street. Before deciding what to do next, Molly has asked you to research the food trucks that come by every day for lunch. You find the following: Each food truck is operated by one worker. All trucks serve a standard lunch box and charge $7. There is no tax or additional charges levied (these are "cash only" operations). One truck owner complained that there was no customer loyalty: any truck with a higher price sees no customers that day; those customers would instead go to another truck. Over the past month, you have eaten at every truck and found they were basically identical. One operator told you that in past years the number of food trucks was steadily increasing, and prices were decreasing, but in recent months the market has been stable, with no changes in the number of trucks, the price of lunch, or the number of customers served. You discover that all the owners rent the physical truck for $150/day from a local company (which had plenty of trucks available for anyone who wanted), and anyone could hire a trained worker at $40/day to operate the truck and serve lunches. Every truck has to pay the City for a daily permit which allows it to park and serve lunches. This permit costs the same for all trucks, regardless of how much they sell. Unfortunately, you forgot to write down how much that permit is! Ooops! Each truck has an identical total variable cost function (per day) of VC(q) = 3q+0.02q2 where q is the number of lunches served. With this function, each truck's marginal cost curve is MC(q) = 3+0.04q.

Answer each of the parts below, clearly indicating your answers. You must explain your reasoning / show your work for full credit. (a) Based on the information above (and only the information above; don't make up other things), list all the items that comprise the fixed costs of running a food truck. (b) What is the minimum value of the average total cost function for a food truck meal? (It is possible to give a number.) Explain. (c) Suppose that further research reveals that the overall market demand for food truck lunches is given by QD = 3750 250P. Where QD is the total quantity of food truck lunches demanded (per day) in the parking lot across the street from Molly's restaurant, and P is the market price of a food truck lunch in dollars. The city decides to limit the number of food trucks that may operate in the parking lot to 10. (However, they don't change the price of the permit.) What price (for a lunch) do you expect to prevail once this limit is implemented? (Hint: You have demand. Think about supply. First think about each individual truck's supply curve. Then you can get the market supply curve.) (d) How does the permit limit will affect consumer surplus in this market? (A quantitative answer is best. If you can't give that, then explain qualitatively.)

2. You run a heating & cooling service company in a small town. When a homeowner has a problem with their furnace or air conditioner, they call you and one of your workers goes out to diagnose and fix the problem. Your company is the only such company in the town. However, many homeowners are handy themselves, so many are able to fix problems on their own. Each homeowner in town is identical and their annual demand curve for the service that only you provide can be described by the equation Q = 1000.5P, where Q is the number of service calls made per year and P is the price you charge per service call. It costs your company $20 in marginal cost for each service call. (Fuel, parts, labor, etc.) For the purposes of this question, let's ignore any fixed costs that you have. (a) If you had to set and stick to a single price pre service call, what price should you charge? (b) A new analyst that you hire from Ross suggests that you run your business as a "Service Club". Homeowners will sign up for this club, for which they'd pay a fixed annual fee. You could then also charge them for each service call you make for them. If you did this, what should you set the annual fee to? What should you charge per service call? (c) Comparing the single price with no annual fee option to the "Service Club" option, which do consumers prefer? Which do you (the producer) prefer? Why?

3. When much schooling in the US moved online due to the COVID-19 crisis, many educators and policy makers grew worried about the "technology gap" that exists between students from low-income and high-income families. There is a worry that many students from low-income families are at risk of not being able to afford the right technology and internet connectivity to keep up with their school work. Seeking to solve this problem, members of Congress are considering a new tax on laptops, with the revenue from the tax being used to help fund educational programs for low-income students. Suppose that laptops are bought and sold in a perfectly competitive market in the US where the demand can be given by P = 4000.005Q and supply can be given by P = 0.003Q. In both equations P is in dollars per laptop and Q is the number of laptops demanded or produced per month. (Ignore any imports or exports of laptops.) One senator proposes a bill that would require laptop sellers to pay a tax of $390 per laptop sold. A rival senator offers a bill that would make laptop consumers pay $10 per laptop bought. In your answers, be as quantitative as possible. "Neither" is not an acceptable answer. You have to pick one or indicate why you would be indifferent. (a) If all you care about is funding the educational programs for low-income students, which of these two proposed bills would you support? Why? (b) As an economist, which of these two bills is better for society? Why?

4. The Dexter cider mill (located in Dexter, MI, about 10 miles west of Ann Arbor) makes and sells delicious doughnuts. Your friend, Homer, greatly enjoys doughnuts and makes many trips to Dexter each year to partake. Suppose that Homer's monthly demand for doughnuts can be represented by Q = 30 3P, where Q is the number of doughnuts he eats, and P is the price per doughnut. (a) If the cider mill charges $2 per doughnut, how many doughnuts will Homer eat each month? How much, in total, will he pay for doughnuts each month? (b) The cider mill sells a "Doughnut Unlimited" membership. For $75 each month, a customer can eat as many doughnuts as he or she wants! If Homer signed up for this membership, how many doughnuts would he eat? How much, in total, would he pay for doughnuts? (c) Which of these pricing schemes does Homer prefer and why?