DO AS HOMEWORK #5 DUE THURSDAY, 17 OCTOBER DURING TUTORIAL

Producer problem and the competitive market

1. Fill in the table below, draw the graph, and in the graph show short run supply curve.

Average
Units of Variable Marginal Average variable Average
output Fixed cost cost Total cost cost fixed cost cost total cost
0 100
1 125
2 145
3 157
4 177
5 202
6 236
7 270
8 326
9 398
10 490

2. Suppose the production function for flyswatters during a particular period can be
represented by

q = f(k,l) = 600k2l2 - k3l3

a. To construct the marginal and average productivity functions of labor (l) for this
function, we must assume a particular value for the other input, capital (k). Write
down the production function if k=10
b. Write down the marginal productivity of labor, MPL, function (when k = 10). What
is the quantity of l which maximizes output? How much is the output?
c. Write down the average productivity of labor function, APL (when k = 10)? At
what quantity of labor is the APL maximum?

3.

Using the above formula, of the following production functions, which exhibit increasing,
constant, or decreasing returns to scale?
a. F(K, L) = K2L
b. F(K, L) = 10K + 5L
c. F(K, L) = (KL)0.5

4. The figure below shows the economies and diseconomies of scale.

A business owner is considering merging two of his car production plants. Based on the
figure above, what recommendation can you give to this owner?

5. From Ch 9 Example 9.7 a tax on gasoline, the following variation:

a. Identify and calculate the welfare impacts if the tax is $1.20 (impact to consumer,
producer, government, and whether there is nett loss or nett gain in the
economy). How is the tax burden distributed among consumers and producers?
Graph your result.
b. Assume that elasticity of demand is -0.7 and elasticity of supply is 0.3 (everything
else being the same as in the example including the tax of $1.00); identify and
calculate the welfare impacts, and graph your results.

6. From time to time, Congress has raised the minimum wage. Some people suggested
that a government subsidy could help employers finance the higher wage. This exercise
examines the economics of a minimum wage and wage subsidies. Suppose the supply
of lowskilled labor is given by Ls = 10w
where LS is the quantity of low-skilled labor (in millions of persons employed each year),
and w is the wage rate (in dollars per hour). The demand for labor is given by
LD = 80 - 10w
a. What will be the free-market wage rate and employment level? Suppose the
government sets a minimum wage of $5 per hour. How many people would then
be employed?
b. Suppose that instead of a minimum wage, the government pays a subsidy of $1
per hour for each employee. What will the total level of employment be now?
What will the equilibrium wage rate be?

7. Japanese rice producers have extremely high production costs, due in part to the
high opportunity cost of land and to their inability to take advantage of economies of
large-scale production. Analyze two policies intended to maintain Japanese rice
production:
(1) a per-pound subsidy to farmers for each pound of rice produced, or (2) a per-pound
tariff on imported rice.

a. Illustrate with supply-and-demand diagrams the equilibrium price and quantity,

domestic rice production, government revenue or deficit, and deadweight loss
from each policy.
b. Which policy is the Japanese government likely to prefer? Which policy are
Japanese farmers likely to prefer?

8. Suppose the demand curve for avocadoes in the US is QD = 40 - 2P, and that the
supply curve is given by QS = 2/3P, where quantity is in million of pounds.
a. If there were no trade, what would be the equilibrium quantity and price for
avocadoes in the US?
b. If the world price is $9/pound, and there were no restrictions on international
trade, how much avocadoes will the United States import?
 c. If the United States imposes a tariff of $3 per pound, what will be the U.S. price
and level of imports? How much revenue will the government earn from the
tariff? How large is the deadweight loss?
d. If the United States has no tariff but imposes an import quota of 8 million pounds,
what will be the U.S. domestic price? What is the cost of this quota for U.S.
consumers of avocadoes? What is the gain for U.S. producers?
e. Compare the welfare impacts of a tariff of $3 and an import quota of 8 million
pounds – which policy is better (hint: compare the welfare impacts between the
two)

9. The United States currently imports all of its coffee. The annual demand for coffee by
U.S. consumers isgiven by the demand curve Q = 250 - 10P, where Q is quantity (in
millions of pounds) and P is the market price per pound of coffee. World producers can
harvest and ship coffee to U.S. distributors at a constant marginal (= average) cost of $8
per pound. U.S. distributors can in turn distribute coffee for a constant $2 per pound.
The U.S. coffee market is competitive.
Congress is considering a tariff on coffee imports of $2 per pound.
a. If there is no tariff, how much do consumers pay for a pound of coffee? What is
the quantity demanded?
b. If the tariff is imposed, how much will consumers pay for a pound of coffee? What
is the quantity demanded?
c. Show this problem in a graph and calculate the welfare impacts to society
d. Does the tariff result in a net gain or a net loss to society as a whole?

10. Among the tax proposals regularly considered by Congress is an additional tax on
distilled liquors. The tax would not apply to beer. The price elasticity of supply of liquor
is 4.0, and the price elasticity of demand is -0.2. The cross-elasticity of demand for beer
with respect to the price of liquor is 0.1.
a. If the new tax is imposed, who will bear the greater burden—liquor suppliers or
liquor consumers? Why?
b. Assuming that beer supply is infinitely elastic, how will the new tax affect the beer
market?

11. Demand and supply for the red chillies market in Indonesia is as follows:
𝑄𝐷 = 100 − 𝑃; 𝑄𝑆 = −80 + 5𝑃
(where P is price of red chillies in thousands of rupiah per kilogram, while Q is quantity
of red chillies in million kilograms)
a. At equilibrium, the price elasticity of demand and supply for red chillies are
respectively |𝜀𝐷 | = 0,43 dan |𝜀𝑆 | = 2,14. If the government implement a tax per
kilogram of produced red chillies, who will experience more of the tax burden, the
producer or consumer. Explain your answer using microeconomics theory that
you have learned.
b. Based on the demand supply functions given above, the government applied a
tax rate of Rp24,000 per kilogram of red chillies. Calculate the welfare impacts of
this policy to the economy.
c. Who experiences most of the tax burden from this policy?

12. The President of the Republic of Indonesia recently signed a Presidential Regulation
on the use of 50% revenue from excise tax on cigarette sales to finance National Health
Insurance (BPJS Kesehatan). Assume the market of cigarette is competitive.
a. Draw a diagram that shows the welfare impact of excise tax on consumers,
producers, government and inefficiency.
b. How is the tax burden distributed among consumers and producers? Who bears
more of the burden?
c. Assume:
 The price of cigarette before the excise tax is of IDR 1.200/unit;
 The quantity of cigarette produced before the excise tax is 400 billion units;
 The quantity of cigarette produced after the excise tax imposition is 300
billion units;
 Price elasticity of demand for cigarette is -1; and
 Price elasticity of supply of cigarette is 1.5.

Calculate the price of cigarette/unit paid by consumers, the price of cigarette/unit

received by producers, excise tax/unit, government revenue, the total tax burden
paid by consumers, the total tax burden paid by producers, and inefficiency
created by this policy? How much fund is estimated to be available for financing
the National Health Insurance?