Economic: Supply and Demand and Cost

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Chapter 5
 Question 1
 The table gives the supply schedules for jet-ski rides by three owners: Rick, Sam, and Tom, the only suppliers of jet-ski rides.  Price (dollars per ride)| Quantity supplied (rides per week)| | Rick| Sam| Tom|

10.00| 0| 0| 0|
12.50| 5| 0| 0|
15.00| 10| 5| 0|
17.50| 15| 10| 5|
20.00| 20| 15| 10|
 a. What is each owner’s minimum supply-price of 10 rides a day? At the minimum supply price of $15, Rick determines to supply 10 rides a day b. Which owner has the largest producer surplus when the price of a ride is $17.50? Explain. Rick is the largest producer surplus from rides when the price is $17.50 a ride. At this price he sells 15 rides a day because the 15th ride costs him $17.50 to produce but Rick is willing to produce the 10th ride for its marginal cost, which is $15, so Rick’s producer surplus on this ride is $5. L ook at below the each producer surplus of each producer:

Rick’s producer surplus = (base x height)/2 = (15 x 7.5)/2 = $56.25 Sam’s producer surplus = (base x height)/2 = (10 x 5.0)/2 = $25.00 Tom’s producer surplus = (base x height)/2 = (5 x 2.5)/2 = $6.25 c. What is the marginal social cost of producing 45 rides a day? At the price of $20, three suppliers are willing to produce total of 45 rides per day to market. Therefore, the market social cost is $20 d. Construct the market supply schedule of jet-ski rides.

Price (dollars per ride)| Quantity supplied (rides per week)| Total of rides market supplied| | Rick| Sam| Tom| |
10| 0| 0| 0| 0|
12.5| 5| 0| 0| 5|
15| 10| 5| 0| 15|
17.5| 15| 10| 5| 30|
20| 20| 15| 10| 45|
Chapter 6
 Question 2
 Chinese power plants have run short of coal, an unintended effect of government-mandated price controls — a throwback to communist central planning ----- to shield the public from rising global energy costs. … Beijing has also frozen retail prices of gasoline and diesel. … Oil refiners say they are suffering heavy losses and some began cutting production last year, causing fuel shortages in parts of China’s south. CNN, May 20, 2008

a. Are China’s price controls described in the news clip price floors or price ceilings? b. Explain how China’s price controls have created shortages or surpluses in the markets for coal, petrol, and diesel. c. Illustrate your answer to b graphically by using the supply and demand model. d. Explain how China’s price controls have changed consumer surplus, producer surplus, total surplus, and the deadweight loss in the markets for coal, petrol, and diesel. e. Illustrate your answer to d graphically by using the supply and demand model.  Question 3

 The retail price of petrol in Australia includes the cost of producing petrol, the cost of distribution to service stations, and a tax. In the first half of 2008, it was proposed that the tax be cut by 5¢ a litre. Assume that the supply of petrol to Australia is perfectly elastic and that the distribution cost is a constant amount per litre. Also assume that the retail price, including the tax, is $1.50 a litre and that the tax is 38¢ a litre. The quantity traded at a price of $1.50 per litre is 18 billion litres a year. Answer the following questions.  a. What is the effect of the reduction of the tax on the retail price? b. If the price elasticity of demand is 0.10, calculate the effect of tax reduction on the quantity of petrol traded. c. What is the tax revenue collected before and after the tax is cut by 5¢ a litre? d. What is the change in deadweight loss from the petrol tax when it is cut by 5¢ a litre? e. Calculate the ratio of the change in deadweight loss from part (d) to the change in tax revenue in part (c). What does this ratio tell you?  Chapter 13

 Question 4
 ProPainters hire students at $250 a week to paint houses. It leases equipment at $500 a week. Suppose that ProPainters doubles both the number of students it hires and the amount of equipment that it leases....
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