University of Calgary
Department of Economics
Principles of Microeconomics
Assignment 1
Econ 201(04) Fall 2019
                            

Concepts

1. Use the concept of the marginal thinking to evaluate the following statement: “The optimal (best) levels of pollution, crime, and safety are greater than zero.”

2. Explain why a technological improvement in the production of one good means that a country can now produce more of other goods than it did previously. Draw a country’s production possibility frontier to help answer this question.

3. Imagine that you are overseer on a small island that only produces two goods: cattle and wheat. About a quarter of the land is not fertile enough for growing wheat, so this is where cattle are grazed. What would happen (i.e., where would you move on the production possibility frontier) if you tried to produce more and more wheat, extending you planting to less fertile soil? Support your answer with a graph.

4. In ski resorts like Whistler, BC, hotel prices are higher in January and February (inseason when there are more skiers) than in November (off-season when there are fewer skiers). Use a demand and supply diagram to explain this phenomenon. Identify this a change as either a change in the quantity supplied, quantity demanded, the demand curve, or supply curve.

5. Due to the higher price of canola, Alberta farmers chose to plant more canola in 2008 relative to previous years. Since Alberta farmers can use their land to plant any number of crops (canola, wheat, barley, oats), the increase in the price of canola had consequences also on the other crops market. Analyze what happened at the market for canola and at the market for the other crops. Use a demand and supply diagram to explain this phenomenon. Identify this a change as either a change in the quantity supplied, quantity demanded, the demand curve, or supply curve.

6. The government is considering implementing one of the two policy alternatives to reduce teen smoking: (i) impose a tax on cigarettes or (ii) implement health warnings and increase education around the ill health effects of smoking. Analyze both suggestions using a demand and supply diagram. Identify this a change as either a change in the quantity supplied, quantity demanded, the demand curve, or supply curve.

Problems

7. Suppose only taxicabs and privately owned automobiles are allowed to use the highway between the airport and downtown. The market for taxicab service is competitive. There is a special lane for taxicabs, so taxis are always able to travel at 110 km/hour. The demand for trips by taxicabs depends on the taxi fare P, the average speed of a trip by private automobile on the highway E, and the price of gasoline G. The number of trips supplied by taxicabs will depend on the taxi fare and the price of gasoline.
   • Using demand and supply diagrams, to answer the following:
     1. How will an increase in the price of gasoline affect the demand for transportation by taxicabs?
     2. How will an increase in the average speed of a trip by private automobile affects the demand for transportation by taxicabs?

• How will an increase price of gasoline affects the supply of transportation by taxicabs?

• Suppose the demand for taxi trips is given by the equation Q_d = 1000+50G−4E− 400P. The supply of trips by taxi is given by the equation Q_S = 200−30G+100P. On a graph draw the supply and demand curves for trips by taxi when G = 4 and E = 30 and find equilibrium taxi fare.
• Solve for the equilibrium taxi fare in a general case, that is, when you do not know G and E. How the equilibrium taxi fare changes as G and E change? Comment on your findings.

8. The price elasticities for cigarettes by habitual smokers (addicts) and potential smokers (young people) are -0.2 and -3 in equilibrium. The government is considering levying a new 10% tax on cigarettes.
   • For each type of consumer, calculate the expected reduction in consumption from the new tax. Explain why the responses of these two groups will differ, focusing on the determinants of elasticities.
   • From which group will the government raise more tax revenue. For each group, will tax revenue fall or rise relative to the original tax?

Applications

9. Please read the following article on the longer term implications of changes in the legal market for cannabis: https://bit.ly/2kFvqjN

Comment on this article using the concepts of long run supply and demand and the adjustments that occur between the short and long term in this market.^[1]

10. Please read the following article on how some people are dealing with course wait lists at UC Berkeley: https://bit.ly/2miJ10L

[1] https://calgaryherald.com/cannabis/cannabis-business/cannabis-shortage-will-turn-to-glut-says-industry-expec

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