Economics of the Restaurant Industry in Canada

The diagram should show ATC, AVC and MC curves, where ATC is above AVC and MC intersects AVC at its minimum point. Due to the fact that 33% of restaurants are experiencing losses, the price in the market must be set below the minimum of the ATC curve. The area between the ATC and the Price line will be the area of losses. The area between the MC and the Price line will be the area of profits, in this case, this area will be below the Price line.

In the long run, if firms are suffering losses, they will exit the market. This exit will cause a decrease in supply, which will push prices up, reducing losses for the remaining firms until they are equal to zero, or even generate a profit. The same mechanism applies to firms generating profits: they will enter, increasing supply and reducing prices, until profits arrive to zero.

The production function can be written as Q = f(K,L)= 4K + 3L; The marginal product of labor is equal to 3.

<p>The production function has increasing returns to scale, if we multiply both inputs by a factor λ&gt;1, the output is multiplied by a factor λ^(3/2) which is bigger than λ The production function can be written as: f(λK, λL) = √(λ^2K^2)(λL)= √(λ^3)(K^2L)=λ^(3/2)√(K^2L) =λ^(3/2)f(K,L)</p> Signup and view all the answers

<p>The diagram should show the demand and supply curve for coffee. The demand curve will likely be relatively inelastic. In 2021, the supply curve moved to the left due to reduced Brazilian harvests, increasing the price and reducing the quantity of coffee sold.</p> Signup and view all the answers

<p>The new level of revenues for the coffee shop is €1,000. The price elasticity of demand is -0.25, which means that for a 1% increase in price, the demand decreases by 0.25%. In this case, the price has increased by 66.67% (from €3 to €5), so the demand will decrease by 16.67% (66.67% x -0.25%). The new demand will be 166.67 (200 x 0.8333). New total revenues are €1,000 (166.67 x €6).</p> Signup and view all the answers

<p>The market equilibrium is at a price of 10 and a quantity of 80. To find the market equilibrium we must obtain the individual supply for each firm. We do this by calculating the MC of each firm. The individual supply will be equal to the MC of the firm. The market supply is the horizontal sum of all 24 individual supplies. We then find the intersection between the demand and supply curves. The market equilibrium will be at the point where the quantity demanded is equal to the quantity supplied. This will be a price of 10, the equilibrium quantity will equal 80 units.</p> Signup and view all the answers

<p>The completed table is:</p> <pre><code> Labour (L) | Output (Q) | Average Product of Labour | Marginal product of labour </code></pre> <p>-------|-------|-------|------- 0 | 0 | - | -<br /> 1 | 50 | 50 | 50<br /> 2 | 70 | 35 | 20<br /> 3 | 210 | 70 | 140<br /> 4 | 500 | 125 | 290</p> Signup and view all the answers

<p>The market is not producing at the social optimum. This is because the social marginal cost is lower than the private marginal cost, indicating that the production of this good generates a positive externality. The government should promote more production of the good, as this would lead to a higher social welfare</p> Signup and view all the answers

<p>A negative externality in production is a cost imposed on a third party by the production of a good or service, and it is not reflected in the market price. In the market diagram, the welfare loss is represented by the area between the social marginal cost curve and the private marginal cost curve, up to the equilibrium quantity. The welfare loss measures the difference between the optimal quantity of production and the quantity produced by the market, highlighting the negative impact of the externality.</p> Signup and view all the answers

<p>The new producer surplus is $900. The equilibrium quantity is given by equating the demand and supply functions: 300-40p=20p. Which yields p=5 and Q=100. The producer surplus will be calculated by the area of the triangle defined by the supply curve, the equilibrium price and the vertical axis: 0.5<em>5</em>100= 250. Once trade opens, the price is set by the international price, which is $3. The equilibrium quantity in this case is given by equating the demand function to the new price (300-40p=3), which yields a quantity of 72. In this case, the producer surplus will be calculated by the area of the triangle defined by the supply curve, the international price and the vertical axis: 0.5<em>3</em>(72)=108. The total producer surplus will be given by the difference between the new producer surplus and the pre-trade producer surplus: 108-250= 900.</p> Signup and view all the answers

<p>The new market price will be $4.50. In this case, we know that the quantity of coconuts available will be 80 coconuts. We equate that quantity to the domestic supply function obtaining the equilibrium price: 80=20p, which yields p=4.5.</p> Signup and view all the answers

<p>The government revenue will by $72. First, we calculate the new international price after applying the tariff. This will be $4 ($3+1). We can find the new equilibrium quantity by equating the demand function to the new price: 300-40p=4, which yields Q=72. The government revenue is given by the tariff per unit ($1) multiplied by the quantity sold: 1*72= 72.</p> Signup and view all the answers

<p>The price paid by consumers is €25.5 and the price received by producers is €22.5. To find the equilibrium price we equate the demand and supply functions: 300-3p=200+8p. Which yields p=8.33. Now consider the subsidy, as the producers receive a subsidy of €3 per unit, they will be willing to supply the same quantity at a price €3 lower than the equilibrium price. The price received by producers will be €5.33. On the other hand, consumers will pay a price €3 higher than the equilibrium price, which is €11.33. The price paid by consumers is the price they effectively pay, however, this price already includes the tax on the product. Therefore, the consumer price without the subsidy is €8.33, hence the price paid by consumers is €25.5 (€11.33-€3).</p> Signup and view all the answers

<p>The price paid by consumers is €25. To find the equilibrium price we equate the demand and supply functions: 300-6p=100+4p. This yields p=20. After applying the 25% ad valorem tax, the price paid by consumers will be 1.25p, which is €25 (1.25*20).</p> Signup and view all the answers

<p>In order to reduce the consumption of alcohol by 30%, the unitary tax will need to be €75. We start by finding the equilibrium price and quantity in the market without the tax: 500-2p=-100+4p. This yields a price of €100 and a quantity of 300. The goal is to reach a new quantity which is 30% lower, this implies reaching a quantity of 210. We plug in the value of Q in the demand function to find the new price that would lead to that quantity: 210 = 500-2p, which yields p=$145. Therefore, we need to increase the price from €100 to €145, the unitary tax required for this price increase will be €75 (145-100).</p> Signup and view all the answers

<p>Consumers are more likely to benefit from a maximum price if supply is inelastic. When supply is inelastic, producers can't easily increase the supply of housing to meet the demand. This means that the maximum price set by the government will be closer to the equilibrium price, leading to a smaller shortage and a less severe impact on the market.</p> Signup and view all the answers

<p>A minimum wage set above the equilibrium wage will cause a decrease in demand for labor, resulting in some unemployment. The influence of the labour demand elasticity on the number of potential workers that decide to join the market is significant. If the labor demand is elastic, a large number of people will potentially choose not to enter the market. The higher the elasticity of labor demand, the worse the effect of the minimum wage is on the number of people entering the market, as they will feel a bigger reduction in wages.</p> Signup and view all the answers

<p>The diagram should show a demand curve that is relatively steep, and a relatively flat supply curve. After the government introduces the subsidy, the supply curve moves to the right, effectively lowering the equilibrium price and increasing the equilibrium quantity. The total gain in welfare generated by the subsidy is the same as the sum of the consumer surplus, producer surplus, and government spending on the subsidy. In this case, the producers will likely benefit more from the effect of the subsidy than the consumers, as the effect on producer surplus is bigger than on consumer surplus.</p> Signup and view all the answers

<p>An inferior good is a good for which demand decreases as consumer income increases. In other words, a consumer will buy less of this good when their income increases, choosing to increase spending on more expensive substitutes.</p> Signup and view all the answers

<p>The value of the Herfindahl index is 6,400. The Herfindahl index is calculated by squaring the market share of each firm and summing the results. In this case, the index is equal to 0.8^2 + 0.2^2 = 0.64+0.04 = 0.68. The value of the index is typically multiplied by 10,000 to get a more manageable number, so it is 6,400 (0.68*10,000).</p> Signup and view all the answers

<p>At equilibrium, producers are maximizing their revenues. This is because the equilibrium price is equal to the midpoint of the demand curve, which is always the price that maximizes total revenues. The equilibrium price is found where Qd equals Qs: 250-2p = 2p. This yields p = 62.5. In this case, the midpoint of the demand curve is Qd/2 = 250/2 = 125. At a price of 62.5, the demand would be 125, confirming that the equilibrium price matches the midpoint of the demand curve.</p> Signup and view all the answers

<p>a) The new producer surplus is $900. The equilibrium quantity is given by equating the demand and supply functions: 300-40p=20p. Which yields p=5 and Q=100. The producer surplus will be calculated by the area of the triangle defined by the supply curve, the equilibrium price and the vertical axis: 0.5<em>5</em>100= 250. Once trade opens, the price is set by the international price, which is $3. The equilibrium quantity in this case is given by equating the demand function to the new price (300-40p=3), which yields a quantity of 72. In this case, the producer surplus will be calculated by the area of the triangle defined by the supply curve, the international price and the vertical axis: 0.5<em>3</em>(72)=108. The total producer surplus will be given by the difference between the new producer surplus and the pre-trade producer surplus: 108-250= 900. b) The new market price will be $4.50. In this case, we know that the quantity of coconuts available will be 80 coconuts. We equate that quantity to the domestic supply function obtaining the equilibrium price: 80=20p, which yields p=4.5. c) The government revenue will by $72. First, we calculate the new international price after applying the tariff. This will be $4 ($3+1). We can find the new equilibrium quantity by equating the demand function to the new price: 300-40p=4, which yields Q=72. The government revenue is given by the tariff per unit ($1) multiplied by the quantity sold: 1*72= 72. d) The market diagram should show the demand curve and the supply curve, the international price (which is $3 in this case), the quantity available under the quota, and the equilibrium price under the quota. The area between the supply curve and the international until the equilibrium quantity represents the producer surplus in this case. The area below the new price, above the supply curve and to the left of the new equilibrium quantity represents the producer surplus under the quota. We can also observe that the area between the demand curve and the international price, from the international equilibrium quantity to the equilibrium quantity under the quota represents the consumer surplus under the quota.</p> Signup and view all the answers

<p>A firm in perfect competition will operate with a price that is below the ATC in the short run, indicating a loss.</p> Signup and view all the answers

<p>In the long run, firms in a perfectly competitive market will not experience losses. Firms that are experiencing losses in the short run will leave the industry due to their inability to cover their costs. This exit will decrease supply leading to an increase in market price until the profits of the remaining firms rise and the price reaches a point where it covers the average total cost. At this point, no other firm has an incentive to enter the market. The long-run equilibrium in a perfectly competitive market is where firms earn zero economic profit. This is because free entry and exit ensure that the market price will eventually settle at a level that is equal to the minimum average total cost.</p> Signup and view all the answers

<p>Q = 4K + 3L, 3</p> Signup and view all the answers

<p>Increasing returns to scale</p> Signup and view all the answers

<p>The supply curve shifted to the left because of decreased global production of Arabica beans, as well as increased prices on dairy products. The market equilibrium changed from a higher quantity and lower price, to a lower quantity and higher price.</p> Signup and view all the answers

<p>€800</p> Signup and view all the answers

<p>Q = 400, P = 30</p> Signup and view all the answers

<p>20, 30, 70, 160, 290</p> Signup and view all the answers

<p>The market is not producing the social optimum. The government should promote more production.</p> Signup and view all the answers

<p>This occurs when the production of a certain good generates a negative effect on third parties. This effect is not included in the private cost of production and leads to a market quantity larger than the socially optimal one.</p> Signup and view all the answers

<p>This diagram shows the impact of an import quota on a market with a domestic demand curve Qa = 300 - 40P and a domestic supply curve Qs = 20P. The quota, represented by the vertical line at 80, limits imports to 80 units, resulting in a higher market price.</p> Signup and view all the answers

<p>Consumers pay €24, producers receive €27</p> Signup and view all the answers

<p>The price paid by consumers is 25.71</p> Signup and view all the answers

<p>The unitary tax is 15</p> Signup and view all the answers

<p>Consumers are more likely to benefit from a maximum price if the supply is inelastic.</p> Signup and view all the answers

<p>A higher labor demand elasticity will have a more significant impact on the number of potential workers that decide to join the market. This is because a higher elasticity means that a change in wages will lead to a larger change in the quantity of labor demanded. As a result, a higher minimum wage will lead to a larger decrease in labor demand and a greater decrease in the number of potential workers willing to enter the market.</p> Signup and view all the answers

<p>The subsidy benefits the producers more.</p> Signup and view all the answers

<p>The value of the Herfindahl index is 6800.</p> Signup and view all the answers

<p>Producers are maximizing revenue at equilibrium.</p> Signup and view all the answers