Economics problem set 1 answers

Econ103 Problem Set1

the second question(production) b

the third question(perfect competition and equilibrium)a, b, c

the fourth question(monopoly and equilibrium)a, b, c, d

I leave most of my problems are calculations and graphics. According to the professor's instruction, plz use the spreadsheet to do the calculus. Graph on my files. Thank you.

Economics 103 Your Name(s):__________________________________________

Professor Friedman Your TA:____________________________________________

Fall 2019 Your Section Time and Day:_____________________________

Problem Set 1

Due Date: October 21 by 4PM

Hand in hard copy to your TA’s mailbox, 1st floor of Gordon Hall

Do not submit answers on line through Moodle

Note that there are two types of problems. You are encouraged to work with someone else in your TA section on the quantitative problems (1, 2, 3, 4); hand in one set of answers to this problems with both your names . Do the essay questions individually (5 and 6) and append separate answers with each person’s name for this along with your group answers to the quantitative questions. Type your answers; hand-written answers will be accepted only by special arrangement. Staple pages together. Be sure to keep a copy of your answers just in case.

This problem set is so much easier to do using a computer spreadsheet that I am tempted to require that you use a spreadsheet.

Total 20 points.

(3 points) Made the right way steamed mussels is delicious. Your friend Rihanna has abandoned her music career to open a bistro, which specializes in French cuisine and, including mussels. She has done some market research and finds that your neighbors value mussels according to the following schedule:

serving

MU mussels

1

$32.00

2

$29.76

3

$27.68

4

$25.54

5

$23.75

6

$22.09

7

$20.54

8

$19.11

9

$17.77

10

$16.52

(1 points) Graph the demand curve for mussels. Does the demand curve have a positive or negative slope? Why?

The demand curve has a negative slope, because the MU mussels is diminishing.

(1 point) How many servings will Rihanna sell at $32? How many at $25.54? At $17.77?

Rihanna will sell 1 serving at $32, 4 servings at $25.54 and 9 servings at $17.77.

(1 point) What will happen to the demand curve if a new study comes out showing shellfish and onions (ingredients in Rihanna’s mussels) increase the risk of cancer? What will happen to the demand curve if instead a study comes out showing they reduce the risk of heart disease?

If a new study comes out showing shellfish and onions increase the risk of cancer, the demand curve will shift to the left since they are bad for people, so there is a lower demand of this good. If a study comes out showing they reduce the risk of heart disease, the demand curve will shift right since they are good for people’s health.

(3 points) Production. Rihanna using equipment that she rents for $150 and ingredients that cost $6.96 a serving for the first 5 servings; for additional servings, she can buy the ingredients at a discount for $6.00. (Note that she signed a lease and pays the rent regardless of how many dinners she serves; note that regardless of how much ingredients she buys for additional servings, she pays $6.96 for the ingredients for the first 5.) She hires workers at $20 each and finds that they produce servings according to the following schedule:

(1 points) Calculate and and graph the marginal cost of each serving. (Use a spreadsheet and show your calculations!) Why does the MC curve have the slope (up, down, or flat) that it does? What happens to the slope of the MC curve as Ella produces more and more servings? Why?

Servings

Total Workers

Marginal wage

Variable

MC

1

0.40

0.40*20=8

$ 6.96

6.96+8=14.96

2

0.86

0.86*20=17.2

$ 6.96

6.96+17.2=24.16

3

1.39

1.39*20=27.8

$ 6.96

6.96+27.8=34.76

4

2.00

2.00*20=40

$ 6.96

6.96+40=46.96

5

2.70

2.70*20=54

$ 6.96

6.96+54=60.96

6

3.50

3.50*20=70

$ 6.00

6+70=76

7

4.43

4.43*20=88.6

$ 6.00

6+88.6=94.6

8

5.49

5.49*20=109.8

$ 6.00

6+109.8=115.8

9

6.71

6.71*20=134.2

$ 6.00

6+134.2=140.2

10

8.12

8.12*20=162.4

$ 6.00

6+162.4=168.4

The MC curve has a positive slope, because the marginal productivity is reducing, the additional output needs more workers to do it. The slope of the MC curve will go up as more and more servings she produces, since the workers she needs are getting more and more (the marginal workers is higher and higher).

(2 points) Calculate and graph the marginal cost of each serving if workers get a raise to $30/hour, with the old productivity. What happens if they also become more productive so each serving can be made with only two thirds as much labor. Show your calculations! Compare the results of high wages and high productivity with the initial situation. Which would you prefer as an employer? Which would you prefer as worker? Which is better for society?

I would prefer higher productivity as an employer, prefer low wages as worker. Higher productivity is better for society.

(4 points) Perfect competition and equilibrium. (please answer correctly and completely)

(1 point) Put the demand and supply curves together (at the original productivity and wages). Rihanna is a musician and never took Economics, so she naively assumes that she is in a perfectly competitive market. How many servings will she sell? At what price?

Rihanna will sell 6 servings at the price 70, since at the point, MC is close to MU.

(1 point) Draw the graph again and shade in the entire area of consumer surplus. Shade in the entire area of producer surplus.

(2 points) Calculate consumer surplus as the sum of the difference between the marginal utility and the price for each serving up to the last sold. Calculate producer surplus as the sum of the difference between price and marginal cost for each serving. What is the dollar value of consumer surplus? What is the dollar value of the producer surplus? What is the dollar value of the total social surplus?

Servings

MC

price

producer Surplus

1

$ 14.56

$ 18.06

$ 3.50

2

$ 15.31

$ 18.06

$ 2.75

3

$ 16.06

$ 18.06

$ 1.98

4

$ 17.06

$ 18.06

$ 1.00

5

$ 18.06

$ 18.06

$ -

Total

$ 9.23

4

$ 19.69

$ 18.06

$ 1.63

5

$ 18.04

$ 18.06

$ 0.02

Total

$ 21.60

(4 points) Monopoly and equilibrium

(1 point) Ella gets smart and realizes that she is the only quality bistro around. Calculate the marginal revenue she gets for each additional serving as the change in total revenue (price times sales). Graph this. What is the new quantity of sales and the new price?

Servings

MC supply

MU demand

MR

1

14.56

27.5

27.5

2

15.31

24.75

22

3

16.06

21.88

16.14

4

17.06

19.69

13.12

5

18.06

18.04

11.44

6

19.06

16.24

7.24

7

20.31

14.61

4.83

8

21.56

13.15

2.93

9

23.06

11.84

1.36

10

24.81

10.65

0.06

1

26.56

9.59

1.01

12

28.56

8.63

1.93

13

30.56

7.77

2.55

14

33.06

6.99

3.15

(1 point) Shade in the entire area of consumer surplus on your monopoly graph. Shade in the entire area of producer surplus.

(1 point) Calculate total consumer and total producer surplus under the monopoly

situation. What is the dollar value of each, and of total social surplus?

serving

MC

PRICE

Producer surplus

1

$ 27.50

$ 21.88

$ 5.62

2

$ 24.75

$ 21.88

$ 2.87

3

$ 21.88

$ 21.88

$ -

total

$ 8.49

1

$ 14.36

$ 21.88

$ 7.32

2

$ 15.31

$ 21.88

$ 6.57

3

$ 16.06

$ 21.88

$ 5.82

total

$ 19.71

(1 point) Compare the sum of consumer and producer surplus for the monopoly with the results for perfect competition. Which is better for consumers? Which is better for producers? Which is better for society? Explain.

It is better for consumers to have perfect competition because they will have more surplus in that market. The producers have more surplus in monopolies rather than in perfect competition so it is more beneficial for producers to have monopolies.it is better for societies to have perfect competition because the total surplus is larger which means the society will have more surplus which will be better for everyone.

(2 points) Moving Equilibrium. Show the effect of each on the monopoly market equilibrium; you don’t need to have exact answers but explain the direction of change in the demand and/or marginal cost curves.

(0.5 points) beef prices rise so people want shellfish.

If beef prices rise, MC would goes up which can make the monopolists to sell with higher prices. And when P=MC, they would like to sell. They would produce less.

(0.5 points) there is an economic recession and income falls

There will be a decrease in demand, and the demand curve would shift left, since the demand for goods is affected by people’s income. The lower income is, the lower demand is.

(0.5 points) poor conditions reduce the mussels catch

The marginal cost curve shifts left. It is because the poor condition limit the supply. The supply decrease and demand maintain will cause the marginal cost curve shift to the left.

(0.5 points) economic recession, lower wages and lower income.

There will be a decrease in demand, and the demand curve would shift left, since the demand for goods is affected by people’s income. The lower income is, the lower demand is.

(4 points) Can consumers change companies? Clothing prices in the United States have been falling for decades. We now import most of our clothing from countries where wages are low and workers labor in unsafe conditions. (In 2013, for example, the Rana Plaza in Bangladesh collapsed killing over 1000 workers, mostly young women, who worked for low wages making clothes for US retailers, including Ivanka Trump.)

Review chapter 3.4 in Real-World Micro, “campus struggles against sweatshops continue.” Do you think that most people want to buy clothes made in unsafe workplaces by poorly paid workers? Why do companies produce under those conditions? There are companies, such as Patagonia and Eileen Fisher, who offer “fair trade” clothing manufactured in unsafe workplaces by workers paid a decent wage. But these companies are swimming against the tide and occupied very small share of the market. Why haven’t they been more successful?

I don’t think most people want to buy clothes made in unsafe workplaces by poorly paid workers. Clothing production pollution is serious, only the economically underdeveloped areas can be mass production of clothing. But low-income people need clothes at a lower price. If production facilities go up and wages go up, the cost of clothing goes up and the price of clothing goes up. The capitalist thinks the profit is supreme, only the cost is low can obtain the bigger profit. Patagonia and Eileen Fisher, these two companies, pay the workers decent wage. The higher the wage is, the higher the cost is and the profit become less. Therefore, they haven’t been successful.

Dean’s Beans is a local Amherst business who sources coffee from poor farmers in the Third World. How is Dean able to pay farmers higher prices for their coffee? Is his business a charity, or can he run it as a profitable capitalist business? (I suggest you follow the links to learn more about Dean’s Beans!)

Dean by building a long-term relationship with farmers for fair trade, so Dean pay farmers higher pieces for their coffee. In this way, farmers show loyalty to Dean, which make the supply chain stable, the quality of products enables them to offer higher prices. He run it as profitable capitalist business.

Why do you think there are more options for fair trade coffee then for clothing?

Coffee and clothing are two different commodities. Coffee is an agricultural and reprocessed product. Clothing is a labor-intensive product, which requires many people, so the cost of clothing industry accounts for a large proportion.