Answer Key for the First Exam-Econ 200-W14

# Answer Key for the First Exam-Econ 200-W14 - Haideh...

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Haideh Salehi-Esfahani--Copyright 2014 First Exam-Econ 200A Winter 2014 90 points- Maximum of 1 hour and 15 minutes allowed Please write legibly and fully label your graphs. We will deduct points for illegible writing, unclear explanations, and unlabeled or mislabeled graphs. Answer key 1. (20 points) Yena has the following MV schedule for pasta—in number of dishes per month—from a local joint, Italy’s Best : Q 1 2 3 4 5 6 7 8 9 MV(\$) \$20 18 16 14 12 10 8 6 4 The price of a pasta dish at Italy’s Best is \$14. a. A chain restaurant nearby also sells pasta dishes but Yena’s MV for pasta at the chain restaurant is half of her MV at Italy’s Best. What is the maximum price that the chain restaurant could charge to attract Yena away from Italy’s Best, if she can only eat at one of the restaurants each month, and the price is a whole dollar number? Write down the rule for her choice of quantity to purchase, show your work and briefly explain. (10 points) Answer: Buy up to where MV = P. At P = \$14, she buys 4 pasta dishes per month at Italy’s Best. TE = \$56 TV = \$68 CS = TV – TE = \$12 For the chain restaurant, her MV schedule is: Q 1 2 3 4 5 6 7 8 9 MV(\$) \$10 9 8 7 6 5 4 3 2 At P = \$6 for the chain, Q = 5, TE = 30, TV = 40, CS = TV – TE = \$10. The price has to be less than \$6. 1

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Haideh Salehi-Esfahani--Copyright 2014 At P = \$5 for the chain, Q = 6, TE = 30 TV = 45 and CS = 15. Therefore at a maximum price, P = \$5, the chain can successfully attract Yena away from Italy’s Best as her CS is higher at the chain. b. Now consider Yena’s purchase at Italy’s Best where the price of pasta is \$14 per dish Suppose the government taxes Yena by \$2 each time she buys pasta. Write down the new rule for her choice of quantity and derive her new MV schedule inclusive of tax. Explain how many pasta dishes she will buy per month once the tax goes into effect. Use a graph (including the demand curves before and after the tax) to illustrate your answer. Show your work. (10 points) Since she pays a tax of \$2 per pasta dish purchased, it implies she pays the price plus a \$2 tax for each pasta dish she purchases. Her decision rule is now: buy Q up to where MV = P + \$2, or, MV - \$2 = P Her new MV— inclusive of the tax -- is: Q 1 2 3 4 5 6 7 8 9 MV(\$)- \$2 18 16 14 12 10 8 6 4 2 At a price of \$14 per pasta dish, she now buys 3 pasta dishes per month. 2
Haideh Salehi-Esfahani--Copyright 2014 2. (18 points) Use an appropriate concept to clearly explain the following: a. A Wall Street Journal article reports that during the economic downturn of 2008- 2009, restaurants lowered the price of their alcoholic drinks in order to boost revenues. Why didn’t the restaurants raise the price of their drinks instead? Explain.

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