Summary Assignment 1 Solution - ECO2200 Economic Issues Algonquin College

Calculate the percentage change of the variable in each of the following cases. Then calculate the percentage change if the movement is occurring in the opposite direction, with what was the final value now the initial value and vice versa. Now calculate a comparable percentage change using the average of the initial and ending values. Express all three changes in absolute value form without positive or negative signs and as whole numbers (i.e. 67%, not 66.6%). a. A fast-food restaurant, which originally sold hamburgers at a price of $6, increases their price to $8. The absolute value of this percentage change is 33 %, the absolute value of the percentage change in the opposite direction is 25 %, and the absolute value of the percentage change calculated using the average of the two values is 29 %. b. The number of autos sold monthly at a car dealership drops from 500 to 350. The absolute value of this percentage change is 30 %, the absolute value of the percentage change in the opposite direction is 43 %, and the absolute value of the percentage change calculated using the average of the two values is 35 %. c. The monthly fee for unlimited texting charged by a smartphone service provider falls from $11 to $4. The absolute value of this percentage change is 64 %, the absolute value of the percentage change in the opposite direction is 175 %, and the absolute value of the percentage change calculated using the average of the two values is 93 %. d. The number of copies of a small-town newspaper purchased weekly rises from 2,500 to 6,500. The absolute value of this percentage change is 160 %, the absolute value of the percentage change in the opposite direction is 62 %, and the absolute value of the percentage change calculated using the average of the two values is 89 %. Page 2 In each case below, determine the effect on the sellers' total revenue and identify whether the demand curve in this particular market is elastic, inelastic, or unit-elastic in the relevant price range. a. When the price per package of a brand of chocolate chip cookies increases from $4 to $7, monthly quantity demanded decreases from 20,000 to 10,000 packages. Initial total revenue is $80,000 and final total revenue is $70,000. Demand is elastic. b. A fall in the price of sugar from $7 to $4 per carton raises weekly quantity demanded from 25,000 to 30,000 cartons. Initial total revenue is $175,000 and final total revenue is $120,000. Demand is inelastic. c. A rise in the quantity demanded of a monthly fashion magazine from 20,000 to 25,000 copies occurs when its newsstand price is reduced from $11 to $9. Initial total revenue is $220,000 and final total revenue is $225,000. Demand is elastic. d. Daily quantity demanded of a particular model of earphones rises from 5,400 to 6,000 earphones if the price drops from $200 to $180. Initial total revenue is $1,080,000 and final total revenue is $1,080,000. Demand is unit-elastic. Page 3 Refer to the table below containing the market demand and supply schedules for leather jackets. Price ($ per jacket) Quantity Demanded (jackets per year) Quantity Supplied (jackets per year) $350 70,000 100,000 300 80,000 80,000 250 90,000 60,000 200 100,000 40,000 150 110,000 20,000 a. Draw a graph showing the market demand and supply curves, D D and S D S D ​ , and the associated equilibrium point. Use the line tools provided to plot only the 2 endpoints of each curve. Indicate each equilibrium point with the tool provided. Page 4 Your Graph Score: 100% Market Demand and Supply for Leather Jackets Price ($ per jacket) Quantity (thousands of jackets per year) Page 5 b. The equilibrium price is $300 and the equilibrium quantity is 80,000 jackets. c. Due to an increase in the number of producers, the annual quantity supplied in this market increases by 60,000 jackets at every price. The new equilibrium price is $200 and the new equilibrium quantity is 100,000 jackets. d. Draw the new market supply curve ($) and indicate the new equilibrium on the graph above. Plot only the 2 endpoints to draw the curve and 1 point to indicate the new equilibrium in the graph above. e. Due to the change in supply conditions, sellers' total revenue will change. When compared with the initial equilibrium price and quantity, sellers' total revenue falls from $24 million to $20 million. Because price and total revenue move in the same direction(s), demand is inelastic in this price range. Page 6 Refer to the table below containing the market demand schedule for canoes. Price ($ per canoe) Quantity (canoes per month) $1,200 600 1,000 800 800 1,000 600 1,200 a. Draw a graph showing the demand curve D. Plot only the endpoints of the curve, 2 points in total, in the graph below. Your Graph Score: 100% Demand for Canoes 1400 1200 1000 800 600 400 0 200 400 600 800 1000 1200 1400 1600 Price ($ per canoe) Demand Quantity (canoes per month) Page 7 b. What is sellers' total revenue at each price? At a price of $1,200 total revenue is $720,000, it is $800,000 at a price of $1,000, $800,000 at a price of $800, and $720,000 at a price of $600. c. On the basis of your answers to parts (a) and (b), how would you describe the elasticity of the market demand curve for canoes? Demand is elastic from prices $1,200 to $1,000, unit-elastic from prices $1,000 to $800, and inelastic from prices $800 to $600. d. What is the numerical value of the coefficient of the price elasticity of demand, e d e d ​ , in the three relevant price ranges? Do not round your interim calculations before obtaining the final solution (i.e. do not clear your calculator). In each case, express the number to two decimal places and do not include a positive or negative sign (i.e. 1:57, not –17 or +1667). From prices $1,200 to $1,000 e d e d ​ is 1.57, from prices $1,000 to $800 it is 1.00, and from prices $800 to $600 it is 0.64. e. Are your answers to parts (c) and (d) for the three relevant price ranges consistent? Yes, because demand in part (c) is elastic when the coefficient in part (d) is greater than 1 and demand is inelastic when the coefficient is less than 1. f. The numerical value of the slope of this demand curve is -1. Remember to enter a minus sign if applicable. Does a demand curve with a constant slope have a constant numerical price elasticity? No, because the value of the price elasticity of demand changes in different price ranges. Page 8 Calculate the numerical value of cross-price elasticity, e x y e xy ​ , in each of the following situations. Do not round your interim calculations before obtaining the final solution (i.e. do not clear your calculator). In each case, express the number to two decimal places and include a negative sign where appropriate (i.e. -167, not -17 or 1667) but leave positive values without a plus sign (i.e. 167, not +167). Identify whether the two products in italics are substitute or complementary products. a. The price Consumer X pays each month for access to the Internet decreases from $50 to $40, causing the quantity demanded of e e-magazines they read on their computer to rise from 4 to 5. The numerical value of cross-price elasticity is -100. The Internet and e e-magazines are complementary products. b. The quantity demanded of do-it-yourself hair-cutting sets increases from 5,000 to 11,000 when the average price of a hairstylist’s cut rises from $30 to $45 per hour. The numerical value of cross-price elasticity is 188. Do-it-yourself hair-cutting sets and hairstylist’s cuts are substitute products. c. A fall in the average price of smartphones from $500 to $350 increases purchases of smartphone apps from 1 million to 3 million per month. The numerical value of cross-price elasticity is -2.83. Smartphones and smartphone apps are complementary products. d. A rise in the price of a canned tuna from $3.5 to $4.5 increases the quantity demanded of luncheon meat from 90000 to 140000 cans per week. The numerical value of cross-price elasticity is 174. Canned tuna and luncheon meat are substitute products. e. A decrease in the price of electricity from $31.75 to $31.25 per kilowatt hour causes an increase in the quantity demanded of electric cars from 650,000 to 1 million. The numerical value of cross-price elasticity is -26.73. Electricity and electric cars are complementary products. Page 9 A market supply curve has three prices — $4.00, $4.50 and $5.00 — with a quantity supplied of 7 metric tonnes at the price of $4.00, 9 tonnes at $4.50, and 11 tonnes at $5.00. a. Is this supply curve a straight line? This curve is a straight line because it has a constant slope of 0.5. b. What is the price elasticity of supply, e s e s ​ , between prices $4.00 and $4.50 and between prices $4.50 and $5.00? Do not round your interim calculations before obtaining the final solution (i.e. do not clear your calculator). In each case, express the number to two decimal places and do not include a positive or negative sign (i.e. 167, not -17 or +166?). The price elasticity of supply is 2.13 between prices $4.00 and $4.50, and is 1.90 between prices $4.50 and $5.00. c. Based on your answers to parts (a) and (b), must a supply curve with a constant slope have a constant numerical elasticity? A supply curve with a constant slope does not need to have a constant elasticity. Page 10 The owner of Quick Buy a variety store has an annual revenue of $600,000. Each year, they pay $30,000 in rent for the store, $10,000 in business taxes, and $500,000 on products to sell. The owner estimates they could put the $100,000 they have invested in the store into a friend’s restaurant business instead and earn an annual 20% profit on their funds. The owner also estimates that they and their family could earn a total annual wage of $90,000 if they worked somewhere other than the store. Include a minus sign (-) in front of any negative values entered as a solution below. a. The total explicit costs of running the store are $540000. The total implicit costs of running the store are $110000. b. The accounting profit of the variety store is $60000. The economic profit of the variety store is $-50000. c. The owner should consider closing down this business because he is making a negative economic profit (i.e. an economic loss). Page 11 Daily production Deloris’s Delights, a shop that makes French pastries, varies with the number of workers employed, as shown in the table below. a. Fill in the table. Include a minus sign () for any negative values entered below. (1) Labour (workers per day) (2) Total Product (pastries per day) (3) Marginal Product (pastries per day) (4) Average Product (pastries per day) 0 0 80 1 80 80 140 2 220 110 185 3 405 135 35 4 440 110 -15 5 425 85 b. In which employment range is marginal product rising? falling and positive? negative? Marginal product is rising when the first, second, and third workers are hired, and total product in this range is rising fairly quickly. Marginal product is falling and positive when the fourth worker is hired, and total product in this range is rising at a slower pace. Marginal product is negative when the fifth worker is hired, and total product in this range is falling. Page 12 c. Draw the total product curve on one set of axes and the average product and marginal product curves on the other set of axes below. In the left graph, use the tools provided to plot points for the total product curve at each employment level up to 5 workers, including the point (0, 0), for a total of 6 points. In the right graph plot 5 points each for the average and marginal product curves for a total of 10 points (exclude the origin point for both curves). Remember that marginal values such as marginal product are plotted halfway between the two relevant employment levels on the horizontal axis. Your Graph Score: 100% Total Product for Pot-Works Total Product Number of Workers Employed per Day Page 13 Your Graph Score: 100% Average and Marginal Product for Pot-Works Flowerpots -200 -180 -160 -140 -120 -100 -80 -60 -40 -20 -0 -20 Number of Workers Employed per Day Marginal Prod Average Prodt AP Page 14 The daily short-run costs for Grab a Spot parking lot are shown in the table below. a. Fill in the table, writing out dollars and cents e.g. $1.00 or $0.10. Note: Round 0.005 up to 0.01. (1) Labour (workers per hour) Total Product (cars parked per hour) Marginal Product (cars parked per hour) Fixed Costs ($) Variable Costs ($) Total Cost ($) Marginal Cost ($) Average Fixed Cost ($) Average Variable Cost ($) Average Cost ($) 0 0 1 0 1 3 0.33 1 3 1 1 2 0.33 0.33 0.67 4 0.25 2 7 1 2 3 0.14 0.29 0.43 3 0.33 3 10 1 3 4 0.10 0.30 0.40 2 0.50 4 12 1 4 5 0.08 0.33 0.42 1 1 5 13 1 5 6 0.08 0.38 0.46 b. Draw a graph showing the marginal cost, average variable cost, and average cost curves. Using the tools provided plot 5 points for the marginal cost curve, 5 points for the average variable curve and 5 points for the average cost curves for a total of 15 points. To manually plot values first click on the line segment between two points plotted in the graphing area then click on the icon of a widget to bring up the manual data entry box. Remember that marginal values such as marginal cost are plotted halfway between the two relevant quantity levels on the horizontal axis. Page 15 Your Graph Score: 100% Short Run Costs for a Parking Lot MC Marginal Cost Average Varia Average Cost Quantity of Cars Parked per Day 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0 3 6 9 12 15 Page 16 c. At which employment level do diminishing returns set in? How is this point related to the behaviour of marginal cost in column (7)? Diminishing returns set in when the third worker is hired. Marginal cost begins to rise when moving from 5 to 8.5 cars parked. d. At what quantity, referring to the quantities in column (2) in the table above, do average variable cost and marginal cost have the same value? At what quantity, referring to the quantities in column (2) in the table above, do average cost and marginal cost have the same value? Marginal cost and average variable cost pass through the same set of values at a quantity of 7 (choose from the quantities listed in the total product column above). Marginal cost and average cost pass through the same set of values at a quantity of 10 (choose from the quantities listed in the total product column above). Page 17 You run a small consulting business, Readyware Solutions, out of your home. During 2024, the business’s total revenue was $51,400, wages for a part-time computer programmer were $21,100, costs for business supplies were $2,800, depreciation charges on office furniture and computer supplies were $1,500, and interest payments on a bank loan were $1,300. a. Create an income statement for Readyware Solutions for 2024 and calculate the business’s annual accounting profit. Annual accounting profit $24700 b. Readyware Solutions has two implicit costs—a normal profit of $3,000 and wages to yourself of $16,300. How can the business’s annual economic profit be derived from its accounting profit? The business’s annual economic profit of $5400 is found by deducting total implicit costs of $19300 from the accounting profit of $24700. Page 18 A business whose only inputs are labour and capital expands its employment level in the long run from 6 to 9 workers and its capital from 2 to 3 machines. Write out dollars and cents, e.g. $100 or $010 for any monetary amounts entered as a solution below. Assuming that the daily wage of $100 and the daily upkeep (including wear and tear) per machine of $20 remain constant in the long run, identify the relevant returns to scale and the change in long-run average cost if daily output were to expand in each of the following possible ways. a. If daily output expands from 80 to 160 units then in this output range the business is experiencing increasing returns to scale while long-run average cost is falling. At 80 units long-run average cost is $ [1.50] and at 160 units it is $ [1.05]. b. If daily output expands from 80 to 120 units then in this output range the business is experiencing constant returns to scale while long-run average cost is staying the same. At 80 units long-run average cost is $ [1.50] and at 120 units it is $ [1.50]. c. If daily output expands from 80 to 106 units then in this output range the business is experiencing decreasing returns to scale while long-run average cost is rising. At 80 units long-run average cost is $ [1.50] and at 106 units it is $ [1.70]. Page 19 The daily short-run costs for a flowerpot maker, Potworks, are shown in the table below. a. Complete the table, writing out dollars and cents, e.g. $1.00 or $0.10. Remember to include a minus sign (-) for any negative values entered and to round 0.005 up to 0.01. (1) Labour (workers per day) Total Product (pots per week) (2) Fixed Costs ($) (3) Variable Costs ($) (4) Total Cost ($) (5) Marginal Cost ($) (6) Average Fixed Cost ($) (7) Average Variable Cost ($) (8) Average Cost ($) 0 0 100 0 100 2.00 1 50 100 200 300 2.00 4.00 6.00 0.91 2 160 100 200 300 0.63 1.25 1.88 1.43 3 230 100 300 400 0.43 1.30 1.74 2.00 4 280 100 400 500 0.36 1.43 1.79 b. Marginal values such as marginal cost described as [a change from one output level to another] and when graphed are plotted halfway between two output levels. c. The average fixed cost curve [falls throughout the range of output], the average variable cost curve [falls until it crosses the MC curve at its minimum then rises], and the average cost curve [falls until it crosses the MC curve at its minimum then rises]. Page 20 d. Draw a graph showing the marginal cost, average fixed cost, average variable cost, and average cost curves. Using the tools provided plot 4 points for the marginal cost curve, 4 points for the average fixed cost curves, 4 points for the average variable cost curves and 4 points for the average cost curve for a total of 16 points. Exclude any point that does not fit on the graph. Remember that marginal values such as marginal costs are plotted halfway between the two relevant quantity levels on the horizontal axis. Answer is complete and entirely correct Graph Summary Tools Average Cost Average Variable Cost Curve 1 Marginal Cost Correct Correct Correct Short-Run Cost Curves for a Pot Maker 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 AC AFC AVC MC Quantity of Flowerpots Produced per Day