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# A2-1 Uncertain: Whether revenue increases or decreases depends on the fact of whether the demand for

VIA rail tickets is inelastic or elastic. If demand is inelastic, then revenue will increase because the percentage increase in price would be larger than the percentage decrease of tickets sold. By definition, for inelastic demand, the change in quantity demanded will be less responsive to changes in price in comparison with elastic demand. VIA rail would be an inelastic product if there were no other substitutes, or there were very few or no alternatives to go from Kingston to Toronto. In contrast, if VIA rail had an elastic demand for their tickets then revenue would decrease. Since the percentage decrease in tickets sold would be larger than the percentage increase in price. By definition for elastic products the quantity demanded is more responsive to changes in price in comparison with inelastic products. Via Rail would be an elastic product if there were numerous substitutes for consumers to get from Kingston to Toronto. These substitutes could include things such as planes and buses. (Refer to diagram 1)

A2-2 True, since Queens University is using a lottery system rather than using the forces of supply and demand to find an equilibrium price, because the prices may rise too high for the average student to afford- essentially the reason for their price ceiling. This is also proves that there is an excess demand for a limited number of residence rooms, essentially, a shortage is evident. Excess demand arises because the quantity demanded is larger than the quantity supplied. The price that Queens is selling its residence rooms is not at equilibriumrather, it is being artificially pushed down by this price ceiling. (Refer to Diagram 2)

A2-3 False, Whether the entire burden of the HST falls on consumers or suppliers depends on the elasticity of demand and the elasticity of supply. As long as demand and supply are both not perfectly elastic or both

not perfectly inelastic then the burden of this HST will be shared between consumers and suppliers. Thus, since for this example supply curves is somewhat elastic the burden would be shared among consumers and suppliers. (Refer to Diagram 3)

A2-4 Uncertain, whether tax revenues would increase or decrease would depend on the fact whether the demand for soft drinks was inelastic or elastic. If demand was inelastic then tax revenues will increase because the percentage increase in price would larger than the percentage by which consumers reduce soft drink consumption. However, if demand is elastic then tax revenues will decrease; because the percentage increase in prices would be smaller than the percentage of consumers reduce soft drink consumption.

A2-5 False, because transferring one dollar between y consumption to x consumption would raise the utility. Since the maximizing utility of x is greater than the maximizing utility of y, the utility can be increased by consuming more x and less y.

A2-6 True, based on the diagram, in the second indifference curve, b and a are equally preferred. Furthermore, on the first indifference curve, a and c are equally preferred. Thus we would make the false assumption that b and c are equally preferred. However, since c is farther out it would be preferred over b based on the more is better mentality, thus indifference curves do not touch. (Refer to Diagram 4)

A2-7 The statement is true, because when there is a rise in the price of an inferior good, the demand for that good decreases. On the other hand, the demand for normal goods rises when the customers incomes increase. The income elasticity of demand is greater than zero if good x is considered a normal good. In contrast, the income elasticity of demand is less than zero if good x is considered to be an inferior good. Therefore, the income elasticity of demand is higher if the household considers the good to be normal than if it considers the good to be inferior. (Refer to Diagram 5)

A2-8 (Refer to Diagram 6) The statement is false, because the loss in consumer surplus is actually greater than the price difference multiplied by the new quantity or (Py-Px) X Qy For simplicity purposes, we shall refer to the aforementioned equation as A since it represents an area of space on the graph below. When we take a closer look at the equation A, we notice that it represents two things: 1. 2. It represents the price difference, (Py-Px), multiplied by the new quantity, (Qy). It also represents a portion of the decrease in consumer surplus.

## At this point, they are equal: A = A

BUT, A only represents a portion of the decrease in consumer surplus. The other portion of the decrease in consumer surplus is the area represented by the variable B. B= , hence, the total decrease in consumer surplus is B + A .

Therefore, the decrease in consumer surplus resulted from a price increase is NOT EQUAL to the price difference multiplied by the new quantity: A + B A. Essentially, B is what offsets the equation, and therefore no matter the magnitude of the decrease in consumer surplus, it will always be greater than the price difference multiplied by the new quantity.

## QD=100-10P when QD=0 0=100-10P P=10

when P=0 = > QP = 100 Equilibrium Qs=QD -35+35P = 100-10P P=3 at p= 3 = > Q= 70 P* is equilibrium price in diagram, Q* is quantity sold

## b) Demand Elasticity QP = 100 -10P 10p = 100 - QP P= 10 -1/10QP

ED= -1/slope (P/Q) ED= (-1/(-1/10)) (3/70) ED= 3/7 ED= ~ 0.43 Supply Elasticity Qs= -35 + 35P 35P= 35 + Qs P= 1 + (1/75) Qs

## Es= (1/slope) (P/Q) Es= 35 (3/70) Es= 1.5

c) Entry of new egg producers will shift supply curve to the right. This will cause equilibrium price to decrease. (Refer to Diagram 7) Since price elasticity of demand for eggs is 3/7, which is less than 1, it means that demand is price inelastic. It means % change in demand has a less dominant effect than % change in price. Since price decreases, however, the demand will increase, overall total expenditure will fall.

d) (Refer to Diagram 8)

## QD= 100-10(4) QD= 60 Consumers will purchase 60 dozen eggs.

Qs= -35 + 35P at p = 4 Qs= -35 + 35(4) Qs= 105 105-60 = 45 Government will purchase 45 dozen eggs 45 x 4 = 180 Government will have lost \$180 / week

## e) QD = 100-10P at QP= 60 60= 100-10P P= \$4 New price = \$4 Quantity traded = 60 dozens

Yes, this policy does create a deadweight loss. The economy is losing potential Economic surplus. At current equilibrium Willingness to Pay is 4 and Willingness to Accept is 2.71. Economy can still achieve greater economic surplus by trading at price of \$3 and quantity of 70, at this point there is no more

marginal economic surplus, thus surplus is maximized. Visually deadweight loss is represented by the shaded region in the graph of part A.

f) Value of quota is the difference between WTP and WTA. WTP = \$4 WTA is price at 60 units on supply curve. Qs= -35 + 35P 60= -35 + 35P P= \$19/7 P~\$2.71 So value = 4 - 19/7 = \$9/7 =~ \$1.29 It is illustrated on diagram by vertical distance denoted by VQ.

A2-10 [For entire question, please refer to Diagram 10] a) Budget line is Bl-a. The opportunity cost of a pizza is two movies. The opportunity cost of a movie is 1/2 pizza. Ians choice would be at Point A, because that is where indifference curve is tangent to budget line.

b) According to the graph above, the budget line moves out to budget line b. When Ian keeps on consuming 10 movies, Ian will have \$50 to purchase pizza with the new price, Ian will then consume 10 pizzas. This is all displayed as point B from the graph above. Ian is better off since his new indifference curve is above the initial indifference curve. It is certain that Ian decides that movies are a normal good since the substitution effect of the price change which in general is a lot greater in cost for movies and would make Ian go from point A to a different point higher than A on the initial indifference curve and there is also

less movies then at A. The income effect, that makes Ian go from there to B which takes a greater amount of movies, and determines the movies a normal good.

## c) PIZZA Table Price Quantity Total Expenditure Before 10 5 5x10 = \$50

After

10

5x10 = \$50

There is no change in total spending and so that the demand of pizza is unitary. The Plastic is, np = 1

## As well, ED = ((-(10 - 5)/7.5) / ((5-10))/7.5)) = 1

d) If Ians parents buy him the \$50 membership, the budget line would be BLa, which means A would be the ideal consumption point. If Ians parents give him cash, then he will have \$150 to buy movies and pizza. Now that both pizza and movies are priced at \$10, his new budget line becomes Blc. He will consume at point C on Blc curve, which will make him better off than consuming at point A. Thus it would be rational for him to want cash over the membership.