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Scarcity forces trade-offs

1.Read case number one (all case studies are posted as “Econ211 Assignment One Supplements” on d2l), and explain how it illustrates each of the seven principles of economics.

2.Read case number two and answer the following questions.
1)What accounts for the fact that before Uber’s arrival, there were typically enough taxis available for everyone who wanted one on good weather days, but not enough available on bad weather days? Illustrate with a demand and supply diagram;
2)How does Uber’s surge pricing solve the problem? Assess Kalanick’s claim that the price is set to leave as few people as possible without a ride.
3)Use a supply and demand diagram to illustrate how Uber drivers can cause prices to surge by taking coordinated breaks. Why is this strategy unlikely to work in Toronto, a large city with an established fleet of taxis?

3.Using an article from a newspaper, magazine, or relevant online source that is about a specific market and that indicates a change in price of the product. Draw a demand and supply diagram to illustrate the change in the price. Remember to attach original source information (URL if online source) to your assignment.

4.Suppose a stamp dealer buys the only two existing copies of a stamp at an auction. After the purchase, the dealer goes to the front of the room and burns one of the stamps in from of the shocked audience. What must the dealer believe, in terms of the price elasticity of the stamp, in order for this to be a wealth-maximizing action? Use a graph to justify your answer.

5.Read case number three and answer the following questions:
1)Use the concepts of consumer surplus and producer surplus to analyze the exchange between Bruce Springsteen and his fans. Draw a diagram to illustrate.
2)Explain how the rise of the Internet has disrupted this exchange.
3)Draw a diagram to show the effect of resellers on the allocation of consumer surplus and producer surplus in the market for concert tickets.

6.In the mid-eighteenth century, the government of New France (modern-day Québec) controlled the price of bread, which was set at a predetermined price above the free market price.

a.Draw a diagram showing the effect of the policy. Did the policy act as a price ceiling or a price floor?
b.What kinds of inefficiencies were likely to have arisen when the controlled price of bread was above the market price? Explain in detail.

One year during this period, a poor wheat harvest caused a leftward shift in the supply of bread and therefore an increase in its market price. Montreal bakers found that the controlled price of bread in Montreal was below the market price.

c.Draw a diagram showing the effect of the price control on the market for bread during this one-year period. Did the policy act as a price ceiling or a price floor?
d.What kinds of inefficiencies do you think occurred during this period? Explain in detail.

7.In each of the following cases involving taxes, explain:
(i)whether the incidence of the tax falls more heavily on consumers or producers, support your answer with calculations.
(ii)Is the demand curve or supply curve more elastic?
(iii)Calculate the deadweight loss.
a.The government imposes an excise tax on the sale of all university and college textbooks. Before the tax was imposed, 1 million textbooks were sold every year at a price of $50. After the tax is imposed, 600 000 books are sold yearly; students pay $55 per book, $30 of which publishers receive.
b.The government imposes an excise tax on the sale of all airline tickets. Before the tax was imposed, 3 million airline tickets were sold every year at a price of $500. After the tax is imposed, 1.5 million tickets are sold yearly; travellers pay $550 per ticket, $450 of which the airlines receive.
c.The government imposes an excise tax on the sale of all toothbrushes. Before the tax, 2 million toothbrushes were sold every year at a price of $1.50. After the tax is imposed, 800 000 toothbrushes are sold every year; consumers pay $2 per toothbrush, $1.25 of which producers receive.

8.The accompanying diagram shows the market for cigarettes. The current equilibrium price per pack is $4, and every day 40 million packs of cigarettes are sold. In order to recover some of the health care costs associated with smoking, the government imposes a tax of $2 per pack. This will raise the equilibrium price to $5 per pack and reduce the equilibrium quantity to 30 million packs.

Scarcity forces trade-offs

1. The scarcity forces to trade off are the first principle of economics which is explained through this case. Due to limited number of free bed and hotel beds, customers face trade off between booking earlier with security and booking late with less security. Cost vs benefit is the second principle of economics which is explained by the case as Priceline groups helps the airlines and the hotel owners to recover some of the costs (Bernanke, Antonovics & Frank, 2015). Thinking at the margin allows the hotel and the airline owners to have a look on how each transaction through Priceline group is impacting on the overall change. The principle that people respond to incentive is also explained through the case as lower price for hotels and full occupancy for the owners worked as an incentive for the respective parties. The principle that trade makes better off has also been justified though this case. Priceline group specialises on having a common platform for customers and sellers providing necessary information regarding the market to the sellers and the customers. Trade allowed each of the players to gain from the market (Goodwin et al. 2015). The principle that market coordinates trade has been depicted in the case as well. The lower market prices attract more customers filling the free seats of airplanes and free beds of hotels. Lastly, the future consequences count and that too has been explained in the case. The investment of Priceline group in European region became successful in the future that resulted in the high valuation of the company.

2. The fact that, on bad weather, the cost of supplying the taxi service is higher than the normal. The number of taxi reduces and hence the supply curve shifts to the left leading to a rise in price.

The surge prices used by Uber deals with the excess demand of the market during the bad weather condition. Increase in price in this situation reduces the demand and passengers who has more valuation of the ride gets their ride and in this way the market gets cleared (Onodipe, Ayadi & Marquez, 2016).

3) The uber drivers, by taking coordinated breaks can surge the price of each ride as it will reduce the number of available cab compared to the demand. That means the supply curve will shift to the left leading to a rise in the price. However, in larger cities like Toronto, established cab fleet can still keep the supply high leading to a failure of the strategy.

Cost vs benefit

3. This news talks about the firewood market of the Maine state of the USA. According to the article, the prices of the firewood are increasing as winter is approaching. Firewood is the main raw material for creating fire for warmth during the winter. In this case the changes in tastes and preferences of the customers has shifted the demand curve to the right leading to increase in equilibrium price and quantity sold in the market (Smith, 2016).

4. In this case the dealer is just reducing the supply of the coveted stamp. Now in order to increase the wealth of the dealer, the price should increase by proportionately more than the decrease in the quantity (Weber, 2017). Now this can only happen if the dealer assumes that the price elasticity of demand for the stamp is inelastic. In other words the dealer assumes that the demand curve is steep (Hussen, 2018). In the below figure the red rectangle is bigger in size than the black rectangle showing the increase in the revenue or the wealth of the dealer.

5. In this case, the Bruce Springsteen sold the tickets at $75 below the equilibrium price which is $250. As a result consumer surplus increased to (a+b) and the producer’s surplus reduced to c as per the above figure.

The resellers of tickets collect the ticket from the bands at low price and sell them to the fans at market equilibrium price (Zeman & Zydney, 2017). That means it is eating up the consumers surplus which used to be given as a present by the band to the fans. 

6. This policy acted as the price floor as the price cannot go lower than that.

b) If the price of bread was above the market equilibrium rate, the suppliers of the market would sell more quantities of bread in the market. On the other hand the customers would reduce their demand at this high price (Hardin, 2015). Consequently, there would be an excess supply in the market of bread.

This still remains as a price floor as price cannot go lower than that. However, it’s not bounding now like before as it will eventually reach the equilibrium (Skousen, 2016).

This cannot make any inefficiency in the market as this price floor is not bounding. The excess demand of the market would reduce as the price would rise and it will reach the equilibrium (Brown & Timmerman, 2015).

7. The elasticity of demand is,

(-40%)/(10%)= -4

Thus the elasticity of demand for books is elastic and hence tax would be more on sellers (Stiglitz & Rosengard, 2015).

  1. ii) In this case the demand curve is more elastic

iii) Deadweightloss=

(50*1000000)-(55*600000)= $17000000

  1. b)
  2. i) The elasticity of demand,

(-50%)/(10%)= -5

Thus, the elasticity of demand for ticket is elastic and tax falls heavily on sellers.

  1. ii) In this case the demand curve is more elastic.

iii) Deadweight loss=

(3 million* 500)- (1.5 million * 550) =$ 675 Million

c)

i)

Elasticity of demand is,

(-60%)/(33.33%)= -1.8

Therefore in this case also the tax would fall heavily on sellers

ii)The demand curve is more elastic than supply.

iii) Deadweight loss=

(2 mllion *1.50)-( 800000*2)= $ 1.4 Million

8. Consumer’s surplus before the taxation,

.5*(4*40)= $80

Consumer surplus after taxation,

.5(5*30)= $75

Therefore the reduction in welfare for customer is $5.

Reference

Bernanke, B., Antonovics, K., & Frank, R. (2015). Principles of macroeconomics. McGraw-Hill Higher Education.

Brown, P. G., & Timmerman, P. (Eds.). (2015). Ecological economics for the anthropocene: An emerging paradigm. Columbia University Press

Goodwin, N., Harris, J. M., Nelson, J. A., Roach, B., & Torras, M. (2015). Principles of economics in context. Routledge.

Hardin, R. (2015). Collective action. RFF Press.

Hussen, A. (2018). Principles of environmental economics and sustainability: an integrated economic and ecological approach. Routledge.

Onodipe, G., Ayadi, M. F., & Marquez, R. (2016). The efficient design of an online course: Principles of economics. Journal of Economics and Economic Education Research, 17(1), 39.

Skousen, M. (2016). The making of modern economics: the lives and ideas of the great thinkers. Routledge.

Smith, H. M. (2016). Understanding economics. Routledge.

Stiglitz, J. E., & Rosengard, J. K. (2015). Economics of the public sector: Fourth international student edition. WW Norton & Company.

Weber, C. M. (2017). Principles of Economics I.

Zeman, L. J., & Zydney, A. L. (2017). Microfiltration and ultrafiltration: principles and applications. CRC Press.

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