2023 Dec Final Microeconomics Exam - PDF

# Final Exam Microeconomics December 2023 ## Question 1 Read the following article about the restaurant industry in Canada. Edmonton Restaurant owners in Edmonton say industry is still struggling - Supply shifts. Cost curves shift upwards Going out to eat is a rare occurrence for some customers...

# Final Exam Microeconomics December 2023 ## Question 1 Read the following article about the restaurant industry in Canada. Edmonton Restaurant owners in Edmonton say industry is still struggling - Supply shifts. Cost curves shift upwards Going out to eat is a rare occurrence for some customers, says manager of El Jardin. Restaurant owners in Edmonton say they are struggling to balance customer expectations with rising food costs as inflation takes the appetite out of dining out. According to an August report by industry group Restaurants Canada, half of Canadian restaurants and food service companies reported operating at a loss or just breaking even. The report said before the pandemic, only seven per cent of the industry was operating at a loss compared to 33 per cent today. It said overall 84 per cent of restaurants reported lower profitability compared to 2019. The cost of ingredients, insurance, and utilities have continued to rise in Alberta and many businesses are finding it difficult to turn around a profit. But that alone hasn’t been the driving force behind declining profits. The Agri-Food Analytics Lab at Dalhousie University surveyed Canadians this year about their attitudes toward restaurants and the higher prices they are now having to pay. More than 81 per cent said dining out was expensive and that they had to rethink where they were going out to eat. ## Question 2 2.1 A firm can produce by combining 4 units of capital with 3 units of labor. Write the corresponding production function. What is the marginal product of labor? [5 marks] 2.2 For the following production function $Q = \sqrt{K^2VD}$, show if it has constant, decreasing, or increasing returns to scale. [5 marks] ## Question 3 Read the following text about what is going on in the coffee market. **FOOD & DRINK / DINING** ### How Your Daily Cup of Coffee Became a Luxury - With Prices to Match Costs to make your daily cuppa have risen across the board for everything from beans to milk to labor. A cup of coffee is becoming more of a luxury item than ever before - and not just those made in your favorite cafe. If you opt for a homemade cup, bean prices at grocery stores have jumped a whopping 22 percent over the past three years, the Washington Post reported on Friday. At cafes and bakeries, customers are spending $6 on average for a drink, according to Toast data cited by the outlet. Those increased costs are due to every little thing that goes into your joe, from the coffee itself to the milk you add in to the labor it takes to put it all together. "Every cup of coffee is a small miracle," Lauren Crabbe, the owner of the San Francisco coffee shop Andytown told the Post. "Just everything that goes into it." The price of coffee beans themselves are the first pain point: Crops have been affected by climate change and extreme weather, with reduced Brazilian harvests in 2021 leading wholesale prices to reach their highest level in years, according to the Post. And since the pandemic began, the commodity price of arabica beans has risen more than 40 percent, dropping slightly this year to $1.46 a pound in September. By the time those beans make it to market, though, they can cost $10 or more a pound, Crabbe said. Unless you take your coffee black, you're also likely adding ingredients that jack up the price even further. Dairy milk currently costs about $4.36 a gallon, up $1 from four years ago, according to USDA data cited by the Post. Plant-based milks - like soy, almond, and oat - can cost twice as much. And flavored drinks have skyrocketed in popularity: Starbucks' love-it-or-hate Pumpkin Spice Latte has been sold more than 600 million times over the past 20 years. Whether you opt for that confection or another specialty flavor, you're paying extra for the sweetness. ## Question 4 4.1 The demand for a product is $Q_d=100-2p$. The industry consists of 24 equal firms with a cost structure represented by $TC=6Q^2+12Q+30$ for each one of the firms. Find the market equilibrium. [10 marks] 4.2. Complete the following table: [3 marks] | Labour (L) | Output (Q) | Average Product of Labour | Marginal product of labor| |---|---|---|---| | 0 | 0 | | | | 1 | 50 | 50 | 20 | | 2 | 70 | 35 | 30 | | 3 | 210 | 70 | 160 | | 4 | 500 | 166.7| 290| ## Question 5 5.1. The private marginal cost for a certain product is €20 and the willingness to pay from consumers is, at this level of production, €30. The social marginal cost associated with the product is €5. Is the market producing the social optimum? Should the government promote more or less production? [5marks] 5.2. Define the concept of a negative externality in production and show in the following market diagram the welfare loss associated with the market equilibrium. [5 marks] ## Question 6 The Marshall Islands are well known for their production of coconuts. Imagine that the Marshall Islands are closed to international trade and the domestic demand and domestic supply functions are: $$Q_d = 300-40p$$ $$Q_s = 20p$$ a) If the world price for coconuts is $3, find the new producer surplus, once the country opens to trade. b) Find the new market price if the government establishes an import quota of 80 units. c) If rather than a quota the government applies an import tariff of $1 per coconut find the government revenue associated with the tariff. d) Represent in a market diagram the domestic demand, domestic supply, and the import quota situation. [15 marks] ## Question 7 7.1. Find the price paid by consumers and the price received by producers if the government applies a subsidy of €3 per unit in the following market. [3 marks] $$Q_d = 300 - 3p$$ $$Q_s = 200 + 8p$$ 7.2. What is the price paid by consumers if the government applies a 25% ad valorem tax to the following market: [3 marks] $$Q_d = 300 - 6p$$ $$Q_s = 100 + 4p$$ 7.3. Which specific unitary tax will reduce the consumption of alcohol by 30% if the market demand and supply are: [3 marks] $$Q_d = 500 - 2p$$ $$Q_s = -100 + 4p$$ ## Question 8 8.1. If the government introduces a maximum price in the housing market, in which case is more likely that consumers benefit, if supply is elastic or inelastic, why? [5 marks] 8.2. The minimum wage can create unemployment. What is the influence of the labor demand elasticity on the number of potential workers that decide to join the market? [5 marks] 8.3. Represent in a market diagram the effect of a subsidy in a market in which demand is quite inelastic and supply is pretty elastic. Is it true that the subsidy mainly benefits producers? [5 marks] 8.4. What does it mean that a product is inferior? [2 marks] 8.4. If two firms operate in a market with the biggest company having a market share of 80%, what is the value of the Herfindahl index? [2 marks] 8.5. Imagine that $Q_d = 250 - 2p$ and $Q_s = 2p$. At the equilibrium, are producers maximizing their revenues, why or why not? [4 marks]