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##### Georgia Tech Econ 3300 Homework 1

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Question;Georgia Tech Econ 3300 Homework 1Georgia Tech Econ 3300 Homework 1;1. A large number of?rms are capable of producing;chocolate-covered cockroaches. The lin- ear, upward sloping supply curve starts;on the price axis at $6 per box. A few hardy con- sumers are willing to buy;this product (possibly to use as gag gifts). Their linear, downward sloping;demand curve hits the price axis at $4 per box. Draw the supply and demand;curves. Is there an equilibrium at a positive price and quantity? Explain your;answer.;2. Ethanol, a fuel, is made from corn. Ethanol production;increased 5.5 times from 2000 to 2008 (www.ethanolfa.org, May 2010). What;effect did this increased use of corn for pro- ducing ethanol have on the price;of corn and the consumption of corn as food?;3. Nataraj (2007)?nds that a 100% increase in the price of;water for heavy users in Santa Cruz, California caused the quantity of water;they demanded to fall by an average of 20%. (Before the increase, heavy users;initially paid $1.55 per unit, buy afterward they paid $3.14 per unit.) In;percentage terms, how much did their water expenditure change?;4. What is the effect of a $1 speci?c tax on equilibrium;price and quantity if demand is perfectly inelastic? What is the incidence on;consumers? Explain.;5. What is the effect of a $1 speci?c tax on equilibrium;price and quantity if demand is perfectly elastic? What is the incidence on;consumers? Explain.;6. Suppose an environmental regulation requires all;polluters to reduce emissions by 50%, even though the cost of pollution control;differs widely from one polluter to another. Why might this be inef?cient?;7. Suppose Humphrey and Matilda live together. Humphrey;currently smokes 20 packs of cigarettes per month, Matilda hates the smoke.;They currently have no agreement restrict- ing smoking. Their only joint;expense is monthly rent, which they split 50:50. Draw an Edgeworth box with two;goods - smoke and rental payments. Make up some reasonable indifference curves.;Show the initial endowment. What Pareto ef?cient points might result from;bargaining to restrict smoke? How does the graph show what price per pack;Matilda might pay to buy down Humphrey?s smoking (i.e. show the relative prices;on your?gure)? How would your answers change if the status quo is that the two;have an agreement for no smoking and Humphrey would like to smoke as much as 20;packs per month? He must seek Matilda?s permission to do so. (Hint: For;Matilda, rede?ne Humphrey?s smoking as smoke reduction.);8. Suppose the economy takes a downturn, and that labor;costs fall by 50% and are expected to stay at that level for a long time. Show;graphically how this change in the relative price of labor and capital affects;the?rm?s expansion path.;1;ECON 3300, Fall 2013 Problem Set 1;9. The short-run cost function of a company is given by the;equation TC = 200 + 55q, where TC is the total cost and q is the total quantity;of output, both measured in thousands. a). What is the company?s?xed cost?;b). If the company produced 100,000 units of goods, what;would be its average variable cost?;c). What would be its marginal cost of production?;d). What would be its average?xed cost?;e). Suppose the company borrows money and expands its;factory. Its?xed cost rises by $50,000, but its variable cost falls to $45,000;per 1000 units. The cost of interest (i) also enters into the equation. Each;1-point increase in the interest rate raises costs by $3000. Write the new cost;equation.;10. Suppose a?rm has the following output and cost;schedule. a). Complete the following table;Q TC FC VC ATC AVC MC;0 8;1 12;2 14;3 20;4 30;5 50;b). Suppose the?rm is a price-taker. If the price is $15;per unit, will this?rm be earning economic pro?ts? How much? What quantity;will it produce?;c). What is the break-even price? What is the shut-down;price?;d). Suppose the?rm can buy an additional machine that;causes it minimum short-run aver- age total cost to become $10. Does this;expansion involve economies or diseconomies of scale? Sketch this situation in;a diagram.

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