Nguyễn Gia Như

1532300183
Phạm Gia Luân
1632300094
Eco 204
Problem set 2

Question 1: (10 points)

How does a tax on a good affect the price paid by buyers, the price received by sellers, and the
quantity sold?
- A good affect the price paid by buyers:
 The tax increases the price of that good, so it costs buyer more to get that good
 The tax on buyers shifts the demand curve to the left
Price A tax on buyers
Price buyers pay Supply, S1
tax
Price without tax
Price sellers receive

D2 D1
0
Q2 Q1 Quantity
- A good affect the price received by sellers:
 The same as the price paid by buyers, the tax makes the price of that good higher
 The tax on sellers shifts the supply curve upward by the amount of the tax
Price A tax on sellers

Price buyers pay

Price without tax tax
Price sellers receive
S2 Demand, D1
S1
0 Q2 Q1 Quantity
- The quantity sold:
 Because the price on good is higher:
 Buyers will buy less
 Sellers have to sell less or sell with a lower price to avoid a surplus on product
 The quantity sold with tax is lower than the quantity without tax.

Question 2: (20 points)

The government has decided that the free-market price of cheese is too low.
a. Suppose the government imposes a binding price floor in the cheese market. Draw a supply-
and-demand diagram to show the effect of this policy on the price of cheese and the
quantity of cheese sold. Is there a shortage or surplus of cheese?
 Effects of binding price floor:
Price of cheese increases lead to the cheese’s quantity sold decreases.
Q(D)<Q(S) – This causes a surplus of cheese and the farmers are protected by this policy

Price surplus
Supply

Price floor
Equilibrium price

Demand
0
Q2
Q1 Q2
Quantity Quantity
Quantity Equilibrium
Supplied
demanded quantity

b. Farmers complain that the price floor has reduced their total revenue. Is this possible?
Explain.
This may possibly happen when the demand is elastic. In this case, increasing cheese price leads
to a decrease in quantity demanded. In other words, higher price makes the sales of cheese
decrease so the total revenue decline as a result.

c. In response to farmers’ complaints, the government agrees to purchase all the surplus
cheese at the price floor. Compared to the basic price floor, who benefits from this new
policy? Who loses?
Farmers benefits from this new policy:
 They are able to sell their products at a high price, this helps increasing their revenue
 Their surplus products are bought by the government
Consumers lose:
 Consumers have to buy the products at a higher price
 They are the people who bear for most of the tax burden
Question 3: (10 points)
If the government places a $600 tax on luxury cars, will the price paid by consumers rise by more
than $600, less than $600, or exactly $600? Explain.
Luxury cars are considered to be luxuries, so the demand is more elastic. Thus, the demand curve is more
elastic than the supply curve
 The price paid by consumers rises by less than $600
But, in terms of perfectly elastic supply, the consumer will take all the burden tax (exactly increase by
$600).
Question 4: (20 points)
XYZ, Inc., makes computers and then sells them door-to-door. Here is the relationship between the
number of workers and XYZ’s output in a given table
 Workers Output Marginal Total Cost= Average Marginal
∆𝑇𝑅 TFC+TVC Total Cost ∆𝑇𝐶
Product = ∆𝑄 Cost= ∆𝑄
0 0 - 200 - -
1 20 20−0 200+100*1=300 300 300−200
1−0
=20 =15 =5
20 20−0

2 50 50−20 200+100*2=400 400 400−300

2−1
=30 50
=8 50−30
=3.33
3 90 90−50 200+100*3=500 500 500−400
3−2
=40 90
=5.56 90−50
=2.5
4 120 120−90 200+100*4=600 600 600−500
4−3
=30 =5 =3.33
120 120−90
5 140 140−120 200+100*5=700 700 700−600
5−4
=20 140
=5 140−120
=5
6 150 150−140 200+100*6=800 800 800−700
=10 150
=5.33 150−140
=10
6−5
7 155 155−150 200+100*7=900 900 900−800
=5 155
=5.8 155−150
=20
7−6
a. Fill in the column of marginal products. What pattern do you see? How might you explain it?
There are 2 situations:
 The marginal product increases from 0-3 workers: the marginal product increases along with the
addition in the workers and quantity output when inputs are added.
 The marginal product decreases from 4-7 workers: in this stage, due to the law of diminishing
returns, when inputs are added, and fixed resource is still constant, the more worker are hired, the
less productive the company is.

marginal product
45 40
40
35 30 30
30
costs

25 20 20
20
15 10
10 5
5
0
1 2 3 4 5 6 7
numbers of workers

b. A worker costs $100 a day, and the firm has fixed costs of $200. Use this information to fill in the
column for total cost.
Total cost = total fixed cost + total variable cost
Total fixed cost = $200 (given)
Total variable cost = $100x (number of worker)
1 worker: Total cost = $300
2 workers: Total cost = $400
3 workers: Total cost = $500
4 workers: Total cost = $600
5 workers: Total cost = $700
6 workers: Total cost = $800
7 worker: Total cost = $900
=> The total cost increases along with the number of workers.
c. Fill in the column for average total cost. (Recall that ATC = TC/Q.) What pattern do
you see?

Average total cost

16 15
14
12
10 8
costs

8 5.81
5.56 5 5 5.33
6
4
2
0
1 2 3 4 5 6 7
numbers of workers
The pattern of Average total cost is U-shaped.
At first, the average total cost is high because of the division of average fixed cost and number of output
added. However, the average total cost kept decreasing because of the increase in the numbers of product
and it remained the same at $5 (average total cost). Eventually, the average total cost increased slightly as
the increase in the quantity of output and average variable cost.
d. Now fill in the column for marginal cost. (Recall that MC = ΔTC/ΔQ.) What pattern do you see?

Marginal cost
25
20
20

15
costs

10
10
5 5
3.33 2.5 3.33
5

0
1 2 3 4 5 6 7
numbers of workers
Marginal cost is U-shaped.
Initially, with the gradual increase in the number of produced output, the marginal cost slightly decreases
and then significant increases.

e. Compare the column for marginal product and the column for marginal cost. Explain
the relationship.
Marginal product (MP) and marginal cost (MC) affect to each other: when the MP increases, the MC
decreases and vice versa.
When 1 input is added, the MP increases as employees are able to work effectively, but after adding more
inputs into the process the MP decreases and the MC increases, this states that employees lack of effective
and productive work. The company is wasting their time and employee wages also.

Marginal cost & Marginal product

50
40
40
30 30
30
20 20 20
costs

20
10
10 5 3.33 3.33 5 5
2.5
0
1 2 3 4 5 6 7
numbers of workers
marginal cost marginal product

f. Compare the column for average total cost and the column for marginal cost. What pattern do you
see?

25
Average total cost & Marginal cost
20
20
15
15
10
costs

10 8
5 5.56 5 5 5.33 5.81
5 3.33 2.5 3.33

0
1 2 3 4 5 6 7
numbers of workers
marginal cost average total cost
The marginal cost and average total cost intersect each other at the number of 5 workers.
When marginal cost is lower than the average total cost, average total cost decreases and vice versa.

Question 5: (20 points)

A monopoly company has the demand function (D) for its products and Total Cost function
(TC) as follows:
(D): P = 100 – 0.01Q ($)
(TC): TC = 30,000 + 50Q ($)
Calculate the quantity of products (Q, unit) that the company will produce to make its
maximum profit?
In terms of monopoly company, in order to maximize profit: MC = MR

 TR = P.Q = (100 – 0.01Q).Q = 100Q – 0.01Q2

 MR = TR’ = 100 – 0.02 Q
 MC = TC’ = 50

To maximize profit:
MR = MC  100 – 0.02 Q = 50
 0.02 Q = 50
 Q = 2,500
 2,500 is the quantity of products that the company needs to produce to get the maximum profit.

Question 6: (20 points)

A company is considering building a bridge across a river. The bridge would cost $2
million to build and nothing to maintain. The following table shows the company’s
anticipated demand over the lifetime of the bridge:

Price per crossing Number of Total revenue Marginal

($) crossing Revenue
8 0 0 --

7 100,000 700,000 700,000

6 200,000 1,200,000 500,000

5 300,000 1,500,000 300,000

4 400,000 1,600,000 100,000

3 500,000 1,500,000 -100,000

2 600,000 1,200,000 -300,000

1 700,000 700,000 -500,000

0 800,000 0 -700,000

a. If the company were to build the bridge, what would be its profit-maximizing
price? Would that be the efficient level of output? Why or why not?
  It is sure that the company is a monopoly, therefore, its profit-maximizing price is when marginal
revenue and marginal cost are equal.

 In monopoly market, the total revenue is maximum when MR = 0 => MR=MC=0.

 In the given table, its highest revenue is $1,600,000 at price per crossing is $4 and number of
crossing is 400,000, so the company can make its profit-maximizing price.

 The efficient level of output is 800,000.

b. If the company is interested in maximizing profit, should it build the bridge? What
would be its profit or loss?
The highest revenue is $1,600,000
Cost of building the bridge is $2,000,000
 The company will lose $400,000 if they build the bridge

c. If the government were to build the bridge, what price should it charge?
- If the government take responsibility to build that bridge, to be affordable, the price
should be set equal to the marginal cost. This is because this price provides accurate
signal to the user about the cost of producing.
- But if the marginal cost is 0, the government would take all the cost of building this
bridge, so they shouldn’t charge for crossing the bridge.
d. Should the government build the bridge? Explain.
$8
Price per crossing

$8

0
800,000 Number of crossing

MR = MC = 0

 The area of the triangle is total of surplus

 1
 Total surplus = 2 8.800,000 = $3,200,000

Because the cost of building the bridge ($2,000,000) is lower than the total surplus
($3,200,000) so the government should build this bridge.