1. Explain why the equilibrium in the model of consumers and firms that we are using...

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1. Explain why the equilibrium in the model of consumers and firms that we are using in class this week is not Pareto optimal. 2. The table below represents demand Q for a firm's output at various prices P. The unit cost of production is $60. P in $ 270 240 210 180 150 120 90 60 30 0 Q 100 200 300 400 500 600 700 800 900 1000 Based on this table, At Q=100, what is the firm's profit? What is the profit-maximizing output? What is the maximum profit that can be obtained (assuming the firm can only use the opportunities in the table}? 3. Suppose that the elasticity of demand for subway rides in New York City is -0.3. The NYCTA raises the fare by 10%. Will its revenue change? By what percentage (approximately)? 4. In his 1995 book on homelessness, sociologist Christopher Jencks argued that the reduction in the price of cocaine that crack caused in the 1980s was responsible for part or all of the rise in homelessness in the US in the 1980s. His reasoning was that when the price of cocaine went down, cocaine became relatively more attractive than housing, and so people increased their consumption of cocaine and reduced their consumption of housing ("oblivion rather than comfort"). Let's think this through. Consider an individual with a fixed income who consumes two goods, cocaine and housing, and spends all their money on those two goods (they are quite poor and don't save). Assume that demand for cocaine is inelastic since it's addictive. When the price of cocaine goes down, how does the person's total expenditure (price times quantity) on cocaine change does it go up or down or stay the same? As a result, how does the person's total expenditure on housing change-does it go up or down or stay the same? How does the quantity of housing consumed (say, the number of nights per month in a cheap hotel room or a flophouse) change? Do you agree or disagree with Jencks? Explain your reasoning. 5. Consider a state in which package liquor sales are regulated. A store can sell liquor only if it has a license to do so. Each town can issue only one license, but licenses can be bought or sold. (This is a simplification of the system in New Jersey.) Relative to a world where anyone who wants to can sell liquor anywhere ("free entry""), how does this system change the price of liquor? How does it change the quantity? Explain why. Liquor licenses turn out to be very valuable, changing hands for hundreds of thousands or even millions of dollars. Explain why they are valuable. Make the best argument you can for this system of liquor licenses. Make the best argument you can against this system of liquor licenses. Could the state achieve the same goals with free entry and a higher tax on liquor? Why do you think it would be hard to change the system? 1. Explain why the equilibrium in the model of consumers and firms that we are using in class this week is not Pareto optimal. 2. The table below represents demand Q for a firm's output at various prices P. The unit cost of production is $60. P in $ 270 240 210 180 150 120 90 60 30 0 Q 100 200 300 400 500 600 700 800 900 1000 Based on this table, At Q=100, what is the firm's profit? What is the profit-maximizing output? What is the maximum profit that can be obtained (assuming the firm can only use the opportunities in the table}? 3. Suppose that the elasticity of demand for subway rides in New York City is -0.3. The NYCTA raises the fare by 10%. Will its revenue change? By what percentage (approximately)? 4. In his 1995 book on homelessness, sociologist Christopher Jencks argued that the reduction in the price of cocaine that crack caused in the 1980s was responsible for part or all of the rise in homelessness in the US in the 1980s. His reasoning was that when the price of cocaine went down, cocaine became relatively more attractive than housing, and so people increased their consumption of cocaine and reduced their consumption of housing ("oblivion rather than comfort"). Let's think this through. Consider an individual with a fixed income who consumes two goods, cocaine and housing, and spends all their money on those two goods (they are quite poor and don't save). Assume that demand for cocaine is inelastic since it's addictive. When the price of cocaine goes down, how does the person's total expenditure (price times quantity) on cocaine change does it go up or down or stay the same? As a result, how does the person's total expenditure on housing change-does it go up or down or stay the same? How does the quantity of housing consumed (say, the number of nights per month in a cheap hotel room or a flophouse) change? Do you agree or disagree with Jencks? Explain your reasoning. 5. Consider a state in which package liquor sales are regulated. A store can sell liquor only if it has a license to do so. Each town can issue only one license, but licenses can be bought or sold. (This is a simplification of the system in New Jersey.) Relative to a world where anyone who wants to can sell liquor anywhere ("free entry""), how does this system change the price of liquor? How does it change the quantity? Explain why. Liquor licenses turn out to be very valuable, changing hands for hundreds of thousands or even millions of dollars. Explain why they are valuable. Make the best argument you can for this system of liquor licenses. Make the best argument you can against this system of liquor licenses. Could the state achieve the same goals with free entry and a higher tax on liquor? Why do you think it would be hard to change the system?