University of Michigan_ BE502: Applied Microeconomics Group Assignment 3. Q&A

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University of Michigan_ BE502: Applied Microeconomics Group Assignment 3. Q&A BE502: Applied Microeconomics Group Assignment 3 1. The New York Times reports that the toll on the Holland Tunnel wa... s raised from $16 to $20. Following the toll increase, traffic fell by 5 percent. The chairman of the Port Authority (which operates the tunnel) audit committee warned that the toll increase could cause toll revenues to decrease by $48 million per year. Is this statement consistent with economic theory? (a) No, it is not consistent. Demand is elastic at the original price and thus revenues would increase if the toll were raised. (b) No, it is not consistent. Demand is inelastic at the original price and thus revenues would increase if the toll were raised. (c) No, it is not consistent. Demand for driving through the Holland Tunnel is perfectly inelastic and thus revenues would increase if the toll were raised. (d) Yes, it is consistent. Demand is elastic at the original price and thus revenues would decrease if the toll were raised. (e) Yes, it is consistent. Demand is inelastic at the original price and thus revenues would decrease if the toll were raised. 2. On September 14, 2017, the Wall Street Journal reported that “Swedish car-parts giant Autoliv, said it is considering splitting itself in two, separating its electronics operation from its business making safety devices like seat belts and air bags.” The article further quoted the CEO, Jan Carlson, as saying, “We believe it is time to let them both individually maximize their potential”. Wall Street initially seemed to agree as Autoliv’s stock was up 8.5% on the news. Based on this information, what does it appear that Autoliv believes is true about its business? (a) There are economies of scale in producing electronics and auto safety equipment (b) There are diseconomies of scale in producing electronics and auto safety equipment (c) There are economies of scope in producing electronics along with auto safety equipment (d) There are diseconomies of scope in producing electronics along with auto safety equipment (e) Both (b) and (c) 3/13 3. (This question and the next both refer to the following setup.) The market for gyms & fitness centers in Ann Arbor is very competitive. While there are some differences between gyms, they are small and for most consumers every gym is exactly the same and they are willing to switch to whatever gym has the cheapest price. Let’s suppose that this market is initially in a long-run equilibrium. Then, the city government decides to impose a new annual licensing fee for all gyms, to help the city cover the cost of increased inspections and enforcement of safety regulations. This fee is an annual fee that all gyms have to pay and is the same for all gyms regardless of their size, how many clients they have, etc. Assume that nothing else about the gyms’ cost structure or about the market changes. Fill in the blanks: Compared to the initial long-run equilibrium, In the new short-run equilibrium, the price charged by gyms will and the profits of each existing gym will . (a) go up ; go up (b) go up ; go down (c) stay the same ; go up (d) stay the same ; go down (e) go down ; go down 4. (Continuing from the previous question.) Suppose that the market for gyms in Ann Arbor reaches its new long-run equilibrium without any further external shocks. You may also assume that all gyms in Ann Arbor operate with the same cost curves. Fill in the blanks: Relative to the starting point before the licensing fee was imposed, the number of gyms in Ann Arbor will , and the quantity of services that each individual gym in the market sells will . (a) go down ; stay the same (b) go down ; go up (c) go up ; go down (d) go up ; stay the same (e) go up ; go up 4/13 5. Delta Airlines is working on pricing its flights between Detroit Metro Airport and Minneapolis-St. Paul Airport. Over years of flying the route, Delta knows that the weekly demand curve it faces for business class tickets on its own flights can be estimated by P = 4250 - 10Q, where Q is number of tickets and P is in dollars per ticket. Delta’s marginal cost for each passenger it flies is $250. Recently, a new startup has come to Delta with a proposal. The startup claims that, using big data collected from a variety of sources, it has devised a system that can identify and charge each passenger a price equal to the maximum amount the passenger would be willing to pay for their plane ticket on the Delta flight from Detroit to Minneapolis. What’s the most that Delta should be willing to pay this startup, per week, for this service? (Assuming there no changes in fixed costs from increasing or decreasing the number of tickets sold.) (a) $200,000 (b) $400,000 (c) $800,000 (d) $1,200,000 (e) $0 6. Suppose that all consumers see beer and pretzels are complementary goods. The State of Michigan imposes a new tax on beer. How will the tax on beer affect the market for pretzels (at least in the short-run)? (a) It will shift out the demand curve for pretzels and therefore shift out the supply curve of pretzels. (b) It will shift out the demand curve for pretzels and therefore increase the price of pretzels. (c) It will shift in the demand curve for pretzels and therefore decrease the price of pretzels. (d) It will shift out the supply curve of pretzels and therefore increase the price of pretzels. (e) It will shift in the supply curve of pretzels and therefore decrease the price of pretzels. 7. The National Flood Insurance (NFI) program provides insurance to property owners, renters and businesses against damages due to flooding. Ted owns a beachfront home in Florida that would cost $1,000,000 to rebuild if there was a flood. Because Ted’s home faces a flooding risk of 2%, his NFI premium is $20,000 per year. (I.e., this is the amount Ted has to pay to be insured, regardless of if his house is damaged.) Ted, however, doesn’t believe in global warming and he is convinced that the actual risk of flooding is only 1%. Despite this, Ted purchases flood insurance. Based on his decision, we know that Ted must be: (a) Risk loving (b) Risk neutral (c) Risk averse (d) Either risk neutral or risk averse (e) We can’t infer anything about Ted’s risk preferences [Show More]

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