. There is growing concern about global warming. There’s even a movie starring Al Gore that focuses on the subject. Some suggest that, in order to reduce carbon dioxide emissions, it is necessary to reduce gasoline consumption. Suppose the federal excise tax on gasoline is increased by $0.75/gall. The following questions explore the effects such a tax increase would have on the market for gasoline.

a. Which side of the market, demand or supply, would be assumed to be affected

by this tax increase, and in what way? What determinant would be affected?

b. With a carefully labeled diagram, illustrate how the enactment of such a law

would affect the market for gasoline.

c. How would the increase in this excise tax affect the equilibrium price and quantity

of gasoline?

d. Would the price of gasoline change by more than, less than, or by $0.75/gall?

Explain.

e. What effect does the elasticity of demand for gasoline have on the size of the

change in equilibrium price and quantity due to the increase in the excise tax?

f. What effect does the excise tax have on the welfare or well being of the buyers,

i.e., are they better or worse off? Why?

g. Are sellers better or worse off? What effect does the excise tax have on the

profits of the sellers? Explain.

h. Who is relatively worse off – buyers or sellers? What does it depend upon?

i. What affect would the tax increase have on the tax revenues taken in by the

federal government? How will the elasticity of demand affect these revenues?

[Hint: tax revenue equals the tax base (in this case equilibrium quantity) times the

per unit tax.]

j. What may be expected to happen to tax revenues over a longer length of time?

Why?

k. Explain the importance of the price elasticity of demand for gasoline in using an increase in the excise tax for gasoline to reduce green house emissions.

2. In China the government controls the retail price of electricity, i.e., there is a price ceiling. The following questions explore the effects on the market for electricity of imposing a price ceiling below the equilibrium price.

a. With a carefully labeled diagram, illustrate how the price ceiling would affect the market for electricity.

b. What effect would the price ceiling have on quantity demanded of electricity?

c. What effect would the price ceiling have on quantity supplied of electricity?

d. What would be created at the price ceiling price?

e. What effect would this price ceiling have on the function that prices play in establishing priorities among alternative uses of resources?

f. What effect would this price ceiling have on the optimal allocation of resources?

g. What effect would a price ceiling have on the profits of the electric companies?

h. Over the past year prices for coal in China have doubled. What affect would this have on the market for electricity?

3. On 01 April 2010 the Obama administration adopted new fuel economy and emissions standards that would require car makers to achieve a fleet-wide average fuel efficiency of at least 35.5 mpg for cars and trucks, up from 26.4 mpg during the 2009 model year. The following questions explore the effects of this regulation on the market for light vehicles sold in the US between 2010 and 2015.

a. Which side of the market, demand or supply, would be assumed to be affected

by this regulation, and in what way?

b. With a carefully labeled diagram, illustrate how the enactment of such a law

would affect the market for light vehicles.

c. How would the regulation affect the equilibrium price and quantity

of light vehicles?

d. What affect would this regulation have on the profits of the auto companies?

4. The Energy Independence and Security Act of 2007 authorized the government to provide as much as $25 B in low interest loans to auto companies to rebuild plants to make smaller, fuel efficient vehicles. The bill states that the money can only be used to overhaul plants that are at least 20 years old and will be upgraded to make vehicles that offer about a 25% improvement in fuel economy over similar models in their class. The interest rates on the loans would be about one third what the auto companies are currently paying to borrow. In Fall, 2008, Congress passed the legislation and the President signed it. The following questions explore the effects of this regulation on the market for smaller, fuel efficient vehicles.

a. Which side of the market, demand or supply, would be assumed to be affected

by this act, and in what way?

b. Which demand or supply determinant would be affected?

c. With a carefully labeled diagram, illustrate how the enactment of such a law

would affect the market for smaller, fuel efficient vehicles.

d. How would the loans affect the equilibrium price and quantity

of smaller, fuel efficient vehicles?

e. What affect would it have on the profits of auto makers?

Consider a manufacturing firm operating a given scale of plant. Assume that the only input that the firm can change the amount of that can be used during the time period considered is labor (L). Assume that the production function between Labor (L) and Total Product (Q) is as given in the table below.

Labor (L) Total Product (Q) Labor (L) Total Product (Q)

1 100 10 1,234

2 250 11 1,314

3 410 12 1,384

4 560 13 1,444

5 700 14 1,494

6 830 15 1,534

7 945 16 1,564

8 1,050 17 1,584

9 1,146 18 1,594

To gain experience with a valuable piece of business software, it is strongly suggested that the student use a spreadsheet software program to perform the calculations and to construct the graphs described in parts A and B below. Any spreadsheet program may be used although students may be most familiar with MS EXCEL. It is assumed that the student is familiar with making calculations using a spreadsheet program.

As indicated on the course Syllabus, it is suggested that MS OFFICE, which includes EXCEL, be installed on external computers that are used. It is installed on all the computers located on the Gannon main campus.

A. Calculations

Instructions. Open a spreadsheet program, such as MS EXCEL. Open a new worksheet. Enter the above data for L in column 1 and the above data for Q is column 2.

For each amount of labor (L), calculate Average Product (AP), which should be placed in column 3 of the spreadsheet, and Marginal Product (MP) using the discrete formula, which should be placed in column 4. Refer to the Single Variable Input Production Lecture Notes for formulas for calculating these two production measures. Ideally, MP would be calculated between each row and placed on a new row created with an amount of labor equal to ½ of the two amounts used in the calculation. In other words the MP between 1 and 2 units of L would be calculated using the discrete formula and placed on a newly created row corresponding to 1.5 units of L. But this is not necessary. Each MP calculation may be placed on the row corresponding to the higher of the two levels of labor used in the calculation. For example, the MP between 1 and 2 units of L would be calculated using the discrete formula and placed on the row corresponding to 2 units of L.

Submit a copy of the EXCEL worksheet before 9:00 PM on the date due indicated on the Assignment Sheet using the Single Input Production Problem Drop Box, which is located on the Angel course Web site in Lessons Tab/Course Documents/Homework Problems. Refer to the course Syllabus for instructions on using the Drop Box. It will not be possible to submit the homework after 9:00 PM on the due date as the drop box will be closed then. Contact ITS Helpdesk if there are any technical difficulties in using the Drop Box.

B. Graphs

Using the EXCEL chart feature, on one diagram graph the relationship between Labor (L) and Total Product (Q), and, on another diagram, graph the relationship between Labor (L) and both Average Product (AP) and Marginal Product (MP). Ideally, MP would be plotted midway between the two amounts of labor used in the calculation, but this is not necessary. It may be plotted corresponding to the higher of the two levels of labor used in each calculation. For example, the MP calculated between 1 and 2 units of L would be plotted corresponding to 2 units of L.

On each graph be sure to label the axes and provide a label or legend for each curve.

There is a tutorial on using the EXCEL chart tool available at:

http://ww2.gannon.edu/cetl/mahan/excel/chart.htm

If there are any technical questions on the use of the EXCEL chart feature, contact Tex, who is the creator of the tutorial, at CETL (814.871.7462, [email protected])

Submit a copy of the graphs before 9:00 PM on the date due indicated on the Assignment Sheet using the Single Input Production Problem Drop Box, which is located on the Angel course Web site in Lessons Tab/Course Documents/Homework Problems. Refer to the course Syllabus for instructions on using the Drop Box. It will not be possible to submit the homework after 9:00 PM on the due date as the drop box will be closed then. Contact ITS Helpdesk if there are any technical difficulties in using the Drop Box.

C. Relationships

Instructions. Open a word processing program, such as MS WORD. Open a new document. Copy and paste the following questions into that new document. Insert the answers in the spaces between the questions. Submit a copy of the WORD document before 9:00 PM on the date due indicated on the Assignment Sheet using the Single Input Production Problem Drop Box, which is located on the Angel course Web site in Lessons Tab/Course Documents/Homework Problems. Refer to the course Syllabus for instructions on using the Drop Box. It will not be possible to submit the homework after 9:00 PM on the due date as the drop box will be closed then. Contact ITS Helpdesk if there are any technical difficulties in using the Drop Box.

On the basis of either the table or the above diagram, answer the following questions:

1. The time period considered would be considered the (long run, short run), where the scale of plant would be considered to be the (fixed input, variable input) and labor would be (fixed input, variable input)

2. The boundary between Stages I and II for labor occurs between _____ and _____ units of labor.

3. Total Product (Q) increases as more labor is used, but at a decreasing rate, between _____ and _____ units of labor. Over this range of usage of labor, Marginal Product (decreases, increases, remains constant) as labor usage increases.

4. Pick some amount of L for which MP > AP. If the amount of L were to increase, the value of AP (increases, decreases, stays the same?) Explain why.

5. Pick some amount of L for which MP < AP. If the amount of L were to increase, the value of AP (increases, decreases, stays the same?) Explain why.

6. How would you characterize the shapes of the AP and MP curves?

7. Over that range of labor for which the Average Product curve is upward sloping, the Marginal Product curve lies (above, below, intersects) it.

8. Over that range of labor for which the Average Product curve is downward sloping, the Marginal Product curve lies (above, below, intersects) it.

9. At what point on the AP curve does the MP intersect it?

10. MP begins to decrease between what two levels of Labor usage? Why?

a. Which side of the market, demand or supply, would be assumed to be affected

by this tax increase, and in what way? What determinant would be affected?

b. With a carefully labeled diagram, illustrate how the enactment of such a law

would affect the market for gasoline.

c. How would the increase in this excise tax affect the equilibrium price and quantity

of gasoline?

d. Would the price of gasoline change by more than, less than, or by $0.75/gall?

Explain.

e. What effect does the elasticity of demand for gasoline have on the size of the

change in equilibrium price and quantity due to the increase in the excise tax?

f. What effect does the excise tax have on the welfare or well being of the buyers,

i.e., are they better or worse off? Why?

g. Are sellers better or worse off? What effect does the excise tax have on the

profits of the sellers? Explain.

h. Who is relatively worse off – buyers or sellers? What does it depend upon?

i. What affect would the tax increase have on the tax revenues taken in by the

federal government? How will the elasticity of demand affect these revenues?

[Hint: tax revenue equals the tax base (in this case equilibrium quantity) times the

per unit tax.]

j. What may be expected to happen to tax revenues over a longer length of time?

Why?

k. Explain the importance of the price elasticity of demand for gasoline in using an increase in the excise tax for gasoline to reduce green house emissions.

2. In China the government controls the retail price of electricity, i.e., there is a price ceiling. The following questions explore the effects on the market for electricity of imposing a price ceiling below the equilibrium price.

a. With a carefully labeled diagram, illustrate how the price ceiling would affect the market for electricity.

b. What effect would the price ceiling have on quantity demanded of electricity?

c. What effect would the price ceiling have on quantity supplied of electricity?

d. What would be created at the price ceiling price?

e. What effect would this price ceiling have on the function that prices play in establishing priorities among alternative uses of resources?

f. What effect would this price ceiling have on the optimal allocation of resources?

g. What effect would a price ceiling have on the profits of the electric companies?

h. Over the past year prices for coal in China have doubled. What affect would this have on the market for electricity?

3. On 01 April 2010 the Obama administration adopted new fuel economy and emissions standards that would require car makers to achieve a fleet-wide average fuel efficiency of at least 35.5 mpg for cars and trucks, up from 26.4 mpg during the 2009 model year. The following questions explore the effects of this regulation on the market for light vehicles sold in the US between 2010 and 2015.

a. Which side of the market, demand or supply, would be assumed to be affected

by this regulation, and in what way?

b. With a carefully labeled diagram, illustrate how the enactment of such a law

would affect the market for light vehicles.

c. How would the regulation affect the equilibrium price and quantity

of light vehicles?

d. What affect would this regulation have on the profits of the auto companies?

4. The Energy Independence and Security Act of 2007 authorized the government to provide as much as $25 B in low interest loans to auto companies to rebuild plants to make smaller, fuel efficient vehicles. The bill states that the money can only be used to overhaul plants that are at least 20 years old and will be upgraded to make vehicles that offer about a 25% improvement in fuel economy over similar models in their class. The interest rates on the loans would be about one third what the auto companies are currently paying to borrow. In Fall, 2008, Congress passed the legislation and the President signed it. The following questions explore the effects of this regulation on the market for smaller, fuel efficient vehicles.

a. Which side of the market, demand or supply, would be assumed to be affected

by this act, and in what way?

b. Which demand or supply determinant would be affected?

c. With a carefully labeled diagram, illustrate how the enactment of such a law

would affect the market for smaller, fuel efficient vehicles.

d. How would the loans affect the equilibrium price and quantity

of smaller, fuel efficient vehicles?

e. What affect would it have on the profits of auto makers?

Consider a manufacturing firm operating a given scale of plant. Assume that the only input that the firm can change the amount of that can be used during the time period considered is labor (L). Assume that the production function between Labor (L) and Total Product (Q) is as given in the table below.

Labor (L) Total Product (Q) Labor (L) Total Product (Q)

1 100 10 1,234

2 250 11 1,314

3 410 12 1,384

4 560 13 1,444

5 700 14 1,494

6 830 15 1,534

7 945 16 1,564

8 1,050 17 1,584

9 1,146 18 1,594

To gain experience with a valuable piece of business software, it is strongly suggested that the student use a spreadsheet software program to perform the calculations and to construct the graphs described in parts A and B below. Any spreadsheet program may be used although students may be most familiar with MS EXCEL. It is assumed that the student is familiar with making calculations using a spreadsheet program.

As indicated on the course Syllabus, it is suggested that MS OFFICE, which includes EXCEL, be installed on external computers that are used. It is installed on all the computers located on the Gannon main campus.

A. Calculations

Instructions. Open a spreadsheet program, such as MS EXCEL. Open a new worksheet. Enter the above data for L in column 1 and the above data for Q is column 2.

For each amount of labor (L), calculate Average Product (AP), which should be placed in column 3 of the spreadsheet, and Marginal Product (MP) using the discrete formula, which should be placed in column 4. Refer to the Single Variable Input Production Lecture Notes for formulas for calculating these two production measures. Ideally, MP would be calculated between each row and placed on a new row created with an amount of labor equal to ½ of the two amounts used in the calculation. In other words the MP between 1 and 2 units of L would be calculated using the discrete formula and placed on a newly created row corresponding to 1.5 units of L. But this is not necessary. Each MP calculation may be placed on the row corresponding to the higher of the two levels of labor used in the calculation. For example, the MP between 1 and 2 units of L would be calculated using the discrete formula and placed on the row corresponding to 2 units of L.

Submit a copy of the EXCEL worksheet before 9:00 PM on the date due indicated on the Assignment Sheet using the Single Input Production Problem Drop Box, which is located on the Angel course Web site in Lessons Tab/Course Documents/Homework Problems. Refer to the course Syllabus for instructions on using the Drop Box. It will not be possible to submit the homework after 9:00 PM on the due date as the drop box will be closed then. Contact ITS Helpdesk if there are any technical difficulties in using the Drop Box.

B. Graphs

Using the EXCEL chart feature, on one diagram graph the relationship between Labor (L) and Total Product (Q), and, on another diagram, graph the relationship between Labor (L) and both Average Product (AP) and Marginal Product (MP). Ideally, MP would be plotted midway between the two amounts of labor used in the calculation, but this is not necessary. It may be plotted corresponding to the higher of the two levels of labor used in each calculation. For example, the MP calculated between 1 and 2 units of L would be plotted corresponding to 2 units of L.

On each graph be sure to label the axes and provide a label or legend for each curve.

There is a tutorial on using the EXCEL chart tool available at:

http://ww2.gannon.edu/cetl/mahan/excel/chart.htm

If there are any technical questions on the use of the EXCEL chart feature, contact Tex, who is the creator of the tutorial, at CETL (814.871.7462, [email protected])

Submit a copy of the graphs before 9:00 PM on the date due indicated on the Assignment Sheet using the Single Input Production Problem Drop Box, which is located on the Angel course Web site in Lessons Tab/Course Documents/Homework Problems. Refer to the course Syllabus for instructions on using the Drop Box. It will not be possible to submit the homework after 9:00 PM on the due date as the drop box will be closed then. Contact ITS Helpdesk if there are any technical difficulties in using the Drop Box.

C. Relationships

Instructions. Open a word processing program, such as MS WORD. Open a new document. Copy and paste the following questions into that new document. Insert the answers in the spaces between the questions. Submit a copy of the WORD document before 9:00 PM on the date due indicated on the Assignment Sheet using the Single Input Production Problem Drop Box, which is located on the Angel course Web site in Lessons Tab/Course Documents/Homework Problems. Refer to the course Syllabus for instructions on using the Drop Box. It will not be possible to submit the homework after 9:00 PM on the due date as the drop box will be closed then. Contact ITS Helpdesk if there are any technical difficulties in using the Drop Box.

On the basis of either the table or the above diagram, answer the following questions:

1. The time period considered would be considered the (long run, short run), where the scale of plant would be considered to be the (fixed input, variable input) and labor would be (fixed input, variable input)

2. The boundary between Stages I and II for labor occurs between _____ and _____ units of labor.

3. Total Product (Q) increases as more labor is used, but at a decreasing rate, between _____ and _____ units of labor. Over this range of usage of labor, Marginal Product (decreases, increases, remains constant) as labor usage increases.

4. Pick some amount of L for which MP > AP. If the amount of L were to increase, the value of AP (increases, decreases, stays the same?) Explain why.

5. Pick some amount of L for which MP < AP. If the amount of L were to increase, the value of AP (increases, decreases, stays the same?) Explain why.

6. How would you characterize the shapes of the AP and MP curves?

7. Over that range of labor for which the Average Product curve is upward sloping, the Marginal Product curve lies (above, below, intersects) it.

8. Over that range of labor for which the Average Product curve is downward sloping, the Marginal Product curve lies (above, below, intersects) it.

9. At what point on the AP curve does the MP intersect it?

10. MP begins to decrease between what two levels of Labor usage? Why?

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