Download Ecns 300 Fall 2015 Midterm #4 Due: Nov. 23, 2015 Suppose the

Ecns 300
Fall 2015
Midterm #4
Due: Nov. 23, 2015
1. Suppose the market consists of 10 demanders and 5 suppliers. Each individual demander has a
demand of Q = 20 – P; each individual supplier’s supply curve is Q = -10 + 2P (where P ≥ 5).
a. Calculate the equilibrium P and Q in the market.
b. Calculate the price elasticity of demand for each demander at the equilibrium.
c. What will happen to the price elasticity of demand at the equilibrium if 4 more
demanders and 2 more suppliers enter this market? Explain, show calculations,
and/or otherwise demonstrate your answer.
2. Last June the Wall Street Journal posted an article entitled “How Do companies Quietly
Raise Prices? They Do This.” The article explained that one way companies raise prices
is by simply putting less product in the same sized package while leaving the nominal
price of the package the same. An example was given of how the spice company
McCormick increased
the price of pepper by
putting 25% less
pepper in each tin
package as shown in
the picture. For
example, the nolonger-available 4
ounce tin sold for
approximately $9.70,
the same as the 3
ounce tin is going for
now on Amazon.com.
This means that the
price increased from
$2.425 per ounce to $3.233. You can Google the Wall Street Journal article to read how
other companies like ConAgra Foods (with Slim Jim Jerky), Proctor & Gamble (With Old
Spice stick deodorant), and Unilever (with Axe stick deodorant) and CVS Health
(Accelerated Wrinkle Repair Moisturizer and Frizz-Defy Hair Serum) similarly raised
prices. A casual trip to the grocery store will reveal that some ice cream manufacturers
fill what used to be a half-gallon carton of ice cream with a few ounces less.
The WSJ article focused on how this practice is flaunting “slack fill” regulations and
inviting lawsuits. However, this practice also presents a problem of a different sort for
the marketing folks at these companies: How do they change the number of packages
they order from their packaging supplier? Clearly, when the price in increased through
this practice, the company will sell less product. That is the law of demand. But, it is not
clear that they will sell fewer packages. For example, when McCormick increased the
price of pepper by cutting the fill amount, they could have sold the same number of tins,
but 25% less pepper since each new 3-ounce tin contained 25% less pepper than the old
4-ounce tins. Indeed, they could have even sold more tins but less pepper. For
example, suppose they previously sold 100 of the 4-ounce tins (400 oz. of pepper), and
now are selling 120 tins of the 3-ounce pepper (360 ounces). This is an example of
where less pepper is being sold at the higher price, but they need more tins to package
it.
a. Show how the price elasticity of demand for pepper (where quantity is measured
in ounces) relates to whether the company needs to order more or fewer tins
from their packaging supplier.
b. What does the elasticity of demand have to be for them to optimally order
exactly the same number of tins as they did before they increased the price of
pepper in this manner?
c. If the elasticity of demand for pepper is 1.4, how many 3-ounce tins will they
need per year if the company was selling 2,000,000 4-ounce tins per year before
they lowered the fill amount?
3. Suppose a consumer’s demand is Q = 10 – P for monthly purchases of a particular
product. The consumer can buy this product at Albertson’s at a price of $7. They learn
that Costco sells the same product at a price of $6. Suppose there is nothing else this
consumer would ever buy at Costco. What is the maximum amount Costco can charge
this consumer for an annual membership fee that allows the consumer to shop at
Costco? (Ignore the effect that interest would have on this problem).
4. Deadweight losses from taxes are attributable to the “incentive effects” that taxes have
on the amounts that people will consume or produce. It has been argued that a
property tax does not have deadweight losses since the supply in a given geographic
area (e.g., Yellowstone County) is fixed and can neither be destroyed nor augmented if
the price changes. (This implies that the supply of land is perfectly inelastic within a
defined geographic area.)
a. Demonstrate the effects of the imposition of a tax (transfers and changes in
consumer and producer surpluses, as well as the effect on government
revenues) if the supply is perfectly inelastic. Show why there is no deadweight
loss.
b. Does it follow there will be no deadweight loss if general property taxes are
imposed or increased? Hint: Is the property tax the same for a vacant lot as it
would be for the same lot that has a luxury high-rise apartment building on it?
c. In parts of Newport Beach, California and Hawaii, land has been owned
separately from the ownership of the structures on the land. The building
owners usually have long-term leases for the land their buildings are on.
Suppose the city of Newport Beach decides to increase the property tax rate on
the land, but not on the buildings on the land.
i. Would there be any deadweight losses due to the increase in property
taxes? Explain your answer.
ii. How would the property tax increase affect the lease prices paid by the
building owners?