Economics of Enterprise Answers

Suppose the income elasticity of demand for food is 0.5, and the price elasticity of demand is -1.0. Suppose also that a woman spends $10,000 a year on food, and that the price of food is $2, and that her income is $25,000. a. If a $2 sales tax on food were to cause the price of food to double, what would happen to her consumption of food? Hint: Since a large price change is involved, you should assume that the price elasticity measures an arc elasticity, rather than a point elasticity. b. Suppose that she is given a tax rebate of $5000 to ease the effect of the tax. What would her consumption of food be now? c. Is she better or worse off when given a rebate equal to the sales tax payments? Discuss.

You were promoted as the manager of a new Clean-Well Sanitary Store that sells cleaning and sanitation products wholesale. You recently read in an article that there the price of vitamins is expected to increase by 20 percent. How will this affect your store’s sales of sanitation products?

Items

Selected Cross price elasticity

Food supplements

0.34

Medicines

0.56

Foods

0.09

 NO NEED TO GRAPH, JUST SHOW COMPUTATIONS

2 Price Discrimination

A monopolist produces a good with constant marginal cost equal to c with c < 1. Assume for now that all consumers have the demand Q(p) = 1 − p. The population is of size 1.

(a) Suppose that the monopolist cannot discriminate in any way among the consumers and has to charge a uniform price, pU . Calculate the price that maximizes profits and the profits that correspond to this price. (10 marks)

(b) Suppose now that the monopolist can charge a two-part tariff (m, p) where m is the fixed fee and p is the price per unit. Expenditure for each con- sumers then is m + p · q. Calculate the two-part tariff that maximizes profits and the profits that correspond to this tariff. (10 marks)

(c) Compare pU and p and comment briefly. Calculate and then compare the situation with a uniform price and a two-part tariff in terms of social welfare. (10 marks)

(d) Assume now instead that there are two types of consumers. The consumers of type 1 have the demand Q1(p) = 1 − p, and the consumers of type 2 have the demand Q2(p) = 1 − p/2. The population is of size 1 and there are equally many consumers of the two types. Calculate the two-part tariff that maximizes the profits of the monopolist. (10 marks)

(e) Compare the two-part tariffs found in questions (b) and (d) and comment briefly. Calculate and compare the two situations in term of social welfare. (10 marks) 

 Use the market schedule below to answer the questions that follow:

P(¢) 5 9 13 17 21 25

       Qs 200 800 1400 Qd 2000 1700 1400

P = price, Qd = quantity demanded (in bags),

2000 2600 3200 1100 800 500

Qs = quantity supplied (in bags)

       a) Determine the equilibrium price and quantity.

b) If price is fixed at ¢21, calculate the excess demand/supply. c) If price falls from ¢13 to ¢9, calculate the:

i. price elasticity of demand. ii. arc price-elasticity of demand.

using a diagram, explain the effect of a successful advertising campaign on the demand for a popular brand of shampoo and conditioner

Show on a graph the effect on the demand curve, the supply curve, the price
balance and the amount of balance of each of the following events.
1. The newspaper market in your city
a) Case 1: journalists' salaries increase.
b) Case 2: Something important happens in your city and the newspapers
are talking about it.

In a 2 commodity case, an increase in the price of one good holding income and the price of the other good constant will

In certain industries, firms buy their most important inputs in markets that are close to perfectly competitive and sell their output in imperfectly competitive markets. Cite as many examples as you can of these types of businesses. Explain why the profits of such firms tend to increase when there is an excess supply of the inputs they use in their production process.

Ralph’s and Vons markets join forces as one entity. since they are businesses that provide similar goods, this form of arrangement best represents a

Xavier has been working at his first post-college job for almost a year when his company gives him a raise, resulting in a paycheck increase of $200, for a total of $400 extra in take-home pay every month. He makes a quick list of possible ways to use that money, along with relevant notes for each.