If VIA Rail wants to increase the revenue generated on its Kingston-Toronto route, it should increase ticket prices for passengers on that route….

A2-1. If VIA Rail wants to increase the revenue generated on its Kingston-Toronto route, it should increase ticket prices for passengers on that route. [Hint: Assume the trains are not filled to capacity.]

A2-2. The Ontario government recently sold a fixed number of passes, at a fixed price, to drive in the high occupancy vehicle (HOV) lanes on the QEW (a major freeway) to drivers who did not meet the regular rules for HOVs – essentially charging a toll to use these lanes. Since there were more applications for passes than quantity available, we can say that the price of these passes was not an equilibrium price for the number sold, or that the number sold was not an equilibrium quantity for the chosen price.

A2-3. Since in most European countries goods are sold to consumers at a price that includes their version of the HST, rather than being charged the tax at the cash register, we can be sure that European consumers do not bear the burden of the tax. [Hint: Assume that the tax is a “per unit” sales tax and that supply curves are somewhat elastic.]

A2-4. If the (inverted) pre-tax supply and demand curves for a good are given by P = 2 + Q and P = 10 – Q respectively, a $2 per unit tax is shared equally between producers and consumers.

A2-5. A household is currently consuming a bundle of goods X and Y such that MUX/pX = 1 and MUY/pY = 2. The household can increase its “utility” by consuming less X and more Y.

A2-6. Assuming that he is rational, Ian’s indifference curves cannot cross. [Hint: Two of the assumptions about preferences are that they are transitive over consumption bundles, and that consumption bundles with more of at least one good and no less of the other are preferred.]

A2-7. If a household’s income and all the prices it faces increase by 5% it will consume more of those goods it considers to be normal and fewer of those goods it considers to be inferior.

A2-8. When the price a good decreases, purchasers gain consumer surplus only on the newly purchased units of the good. Problems [52 marks – marks for each part as shown]

 A2-9. Suppose that the weekly market for eggs can be characterized by the following equations. QS = –35 + 35P QD – 10P where QS and QD are quantities in dozens and P is the price per dozen. (a) Graph the supply and demand curves. Be sure to calculate the P and Q intercepts for demand and the P intercept for supply. Calculate and illustrate the equilibrium price and quantity. [6] (b) Calculate both the demand and supply elasticity around the equilibrium point. [Hint: you can use either the point method or the average arc (midpoint) method.] [6] (c) Would the entry of new egg producers increase or decrease total spending on eggs? Explain with reference to your answer from part (b). [4] (d) Suppose the government wants to increase the price of eggs to $4 and is considering various options for achieving this goal. The first option is for the government to set a price floor at $4 at which point it will purchase eggs. How many dozen eggs will be purchased by consumers? by the government? How much would such a program cost the government every week? [4] (e) Suppose instead that the government institutes a supply management program that restricts the quantity to 60. It enforces this by granting quotas for 60 units of output to existing producers. What is the new price and quantity traded? Does this policy create deadweight loss (DWL) in the egg market? Briefly explain and identify any such DWL in your diagram. [6] (f) What is the value of a unit of quota? Illustrate in your diagram. [4]

 A2-10. Suppose a household has $1000 to spend every month on two goods, food (F) and a composite commodity representing all other goods (Y). Assume initially that the price of food is $5 and the price of the composite commodity is (by construction) $1. (a) Illustrate the budget line faced by the household, with the composite commodity on the vertical axis and food on the horizontal axis. What is the opportunity cost of a unit of food? a unit of Y? Using an indifference curve, illustrate the household’s choice of 100 units of food and 500 of Y. [4] (b) Suppose the price of food rises to $10. If the household continues to consume 500 units of Y, how much food is consumed? Illustrate the new consumption point in your diagram. Is the household better or worse off? Is Y a normal or inferior good for this household? Explain. [6] (c) Explain why the household’s response to the price increase allows us to infer that its demand curve for food is unit elastic (elasticity equal to one). [6] (d) Now suppose that the government wants to support this household given the rising price of food. It offers the household the choice of two forms of support. Either the government will subsidize food purchases so that the price to the household falls back to $5, or it will send the household $500 per month. Explain why the household would prefer the second option. [6]

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