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Homework #3 of Managerial Economics

Due date: 25 of December


1. A survey shows an increase in drug use by young people. In the ensuing debate,
two hypotheses are proposed:
Hypothesis I: Reduced police efforts have increased the availability of drug on the
street.
Hypothesis II: Cutbacks in education efforts have decreased awareness of the dangers
of drug addiction.
A!"se supply#and#de$and diagra$s to show how each of these hypotheses could
lead to an increase in the %uantity of drugs consu$ed.
&!How could infor$ation on what has happened to the price of drugs help us to
distinguish between these e'planations(
Answer:
A! Hypothesis I: )upply increases and the supply curve shifts to the right, so the
price falls and the %uantity rises. Hypothesis II: *e$and increases and the de$and
curve shifts to the right, so the price rises and the %uantity rises.
&! Hypothesis I: the price falls+ Hypothesis II: the price rises.
,.-'plain why the following $ight be true: A drought around the world raises the
total revenue that far$ers receive fro$ the sale of grain, but a drought only in .ansas
reduces the total revenue that .ansas far$ers receive.
Answer: /he de$and for the world grain is relatively inelastic, while the de$and for
the .ansas grain is relatively $ore elastic. As a worldwide drought reduces the supply
of the world grain, the world price of grain rises significantly and the %uantity of grain
falls insignificantly. /herefore, total revenue that world far$ers receive rises. 0n the
other hand, as a drought only in .ansas reduces the supply of .ansas grain, the price
of grain rises insignificantly and the %uantity falls significantly. /herefore, total
revenue that .ansas far$ers receive falls.
1.Congress and the president decide that the "nited )tates should reduce air pollution
by reducing its use of gasoline. /hey i$pose a 23.43 ta' for each gallon of gasoline
sold.
A!)hould they i$pose this ta' on producers or consu$ers( -'plain carefully using a
supply#and#de$and diagra$.
&!If the de$and for gasoline were $ore elastic, would this ta' be $ore effective or
less effective in reducing the %uantity of gasoline consu$ed( -'plain with both words
and a diagra$.
C!Are consu$ers of gasoline helped or hurt by this ta'( 5hy(
Answer:
A! &oth ways lead to the sa$e results.
&! 6ore effective in reducing the %uantity of gasoline consu$ed
C! Hurt, because consu$er surplus certainly falls due to this ta'.
*!Hurt, because the reduction in the sale %uantity of gasoline results in a decrease in
the de$and for workers in the oil industry. /herefore, the wage that workers receive
falls and the e$ploy$ent falls as well.
7.8antas operates a fleet of over 133 &oeing 9et aircraft. Co$$ercial passenger 9ets
$ust be operated by a pilot and co#pilot. 6any 9ets carry cargo in their :bellies:,
under the passenger seating areas. Consider each of the following costs. Identify
which are 9oint costs of passenger and belly cargo services, which are fi'ed costs of
passenger service, and which are both.
A!Cockpit personnel: All 9ets, large and s$all, re%uire a pilot and co#pilot. &elly
cargo service re%uires no additional officers in the cockpit.
&!Airport landing fees: )o$e airports charge landing fees by weight of the aircraft,
while others levy a fi'ed fee, regardless of weight.
C!;uel: <arger aircraft and those carrying heavier loads will consu$e relatively $ore
fuel.
Answer:
A! =oint cost, and also a fi'ed cost.
&!If the landing fee varies with weight, then it is not 9oint or fi'ed. If a 9et carries an
additional 133 pounds of cargo, the airline $ust pay additional fees. )i$ilarly, if the
9et carries an additional passenger. If the landing fee is fi'ed, then it is a 9oint cost
and a fi'ed cost.
C!>either a 9oint cost, nor a fi'ed cost. If a 9et carries an additional 133 pounds of
cargo, the airline $ust spend $ore on fuel. )i$ilarly, if the 9et carries an additional
passenger.
4.In the 1?@3s, $e$bers of 0A-C decided to raise the world price of oil to increase
their inco$es. /hese countries acco$plished this goal by 9ointly reducing the a$ount
of oil they supplied. ;ro$ 1?@1 to 1?@7, the price of oil rose $ore than 43B. /hen a
few years later, 0A-C did the sa$e thing again. ;ro$ 1?@? to 1?C1, the price of oil
appro'i$ately doubled. Det, 0A-C found it difficult to $aintain a high price. ;ro$
1?C, to 1?C4, the price of oil steadily declined about 13B per year. In 1??3, the price
of oil was back to where it began in 1?@3, and stayed at that low level throughout
$ost of the 1??3s. "se the de$and#and# supply diagra$s to show the short run and
long run effects of the reduction in the oil production.
Answer: /he short#run de$and for oil is inelastic )hort#run de$and curve is
steeper!, while the long#run de$and for oil is $ore elastic <ong#run de$and curve is
flatter or even flat!. As the supply of oil decreases, the price rises significantly in the
short run. However, the price falls back to al$ost the original level in the long run.
E./ypical real#estate broker: :In California, the seller always pays the brokerFs
co$$ission, so, buyers get brokerage services free.:
6&A: :If the custo$ were for the buyer to pay the co$$ission, then would sellers
get brokerage services free(:
Real#estate broker, clearly losing patience: :/hat is a purely hypothetical scenario, but
if that situation were to arise, yes, I guess youFre right.:
A!Assu$e that each seller pays a brokersF co$$ission of 21C,333. /hen, the supply
of houses includes the cost of brokerage. Illustrate the $arket e%uilibriu$ with a
price of 2113,333 per house and sale of ,33,333 houses a year.
&!>ow suppose that buyers rather than sellers pay the 21C,333 co$$ission. "sing
your figure, illustrate the following: i! shift the supply curve down by 21C,333 since
sellers do not pay the co$$ission, and ii! shift the de$and curve down by 21C,333
since buyers now pay the co$$ission.
C!Co$pare the $arket e%uilibria of A! and &! in ter$s of i! the net price received
by sellers, and ii! the net price paid by buyers. >et prices are net of brokerage
co$$ission, if any!.
Answer:
The net price would not be afected for either buyer or seller.

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