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Eco 101
Homework Assignment 3
The due date for this assignment is Thursday February 17.
Instructions: Complete the following questions and turn in your solutions at the end of the class lecture on the date due. Remember to include your name and student number on your submitted document.
Question #1 – Definitions i. Change in supply ii. Change in quantity supplied iii. Change in demand iv. Change in quantity demanded v. Market failure vi. Pollution vii. Externality viii. Social cost of production ix. Luxury good x. Emission fees xi. Pollution permits xii. Marginal cost xiii. Rising marginal cost xiv. Subsidy
Question #2 – Elasticity of demand
- The following graphs represent demand and supply curves for: (i) the market for alcohol in terms of bottles of vodka, and (ii) the market for heroin.
• The market for alcohol
Price of Alcohol ($/ bottle of vodka)
Quantity of Alcohol (# of bottles of vodka)
S
D
Q *
P *
The Market for Alcohol
• The market for heroin
Price of Heroin ($/ unit)
Quantity of Heroin (# of units)
S
D
Q *
P *
The Market for Heroin
i) In which market is the demand more elastic?
ii) In which market is the demand more inelastic?
iii) In question (ii) above your answer should have been the market for heroin.
Why would it be reasonable to expect the demand for heroin to be quite
inelastic? (Remember that an inelastic demand curve will mean that the
quantity is not very sensitive to changes in prices). In your answer you
should mention something about the role of addiction and why it plays
more of a role in the heroin market than in the market for alcohol.
iv) Re-create the following graph and show that when the price is raised from
P*^ to P/^ that the change in quantity will be larger with the elastic demand
curve than with the inelastic demand curve.
Price
Quantity
S
D (^) inelastic
D (^) elastic
Q *
P *
P /
v) Suppose the government decides to legalize heroin. Now suppose the
government decides there is too much heroin use after it has been legalized and it decides to reduce consumption of this drug by imposing an excise tax (basically a tax on each unit consumed). In which scenario (i.e. with an elastic demand or an inelastic demand) will the tax be more effective in reducing consumption and why (hint – the “why” will have something to do with elasticity)?
vi) Deep deposits of oil located on land in peaceful Arab countries and Russia - $45,000 per 1,000 barrels vii) Shallow deposits of oil located on land in remote regions of the US such as the Alaskan Wildlife refuge in Alaska - $50,000 per 1,000 barrels viii) Shallow deposits of crude oil located in hostile countries like Iraq - $55,000 per 1,000 barrels ix) Deep deposits of crude oil located in hostile countries like Iraq - $60,000 per 1,000 barrels x) Recycling used tires and other petroleum based products - $80,000 per 1, barrels
- Draw the supply curve for oil based on the above data as shown below: (also include labels for the points on the supply curve)
Price per barrel
S
2,
25
20
1,
The market for crude
Quantity of barrels
ii)
i)
- Explain why the cost of delivered oil goes up from scenario i) to the subsequent scenarios: a. i.e. from i) to ii) the difference in cost is represented by increased transportation and other import costs b. from i) to iii) is the difference in cost for drilling deeper; c. from i) to iv) is the additional cost with building an off-shore rig and transporting the oil to market; d. etc…
- When the price of oil is $50 per barrel which types of oil companies are making the most money?
- If the price of oil were $25 (suppose there was a massive deposit of oil found under the state of Mississippi) how much oil would produced by recycling? How much would be imported from Iraq?
