Econ Problem Set 6 with Diagrams

[Daniel Zarovy]

Hey Guys,

I inserted the diagrams for Problem Set 6 (see attached).  There's three of them.  Feel free to check them out and let me know if you have any comments/modifications.

Also, there's still a couple questions (highlighted in red) we need to answer.  Any thoughts?

Later,
Daniel

[Dustin Goot]

Hey all,

I found some similar problems in earlier problem sets, and it looks like there are a few goofs on what we have. I'm being kicked out of the library right now, but I should have some edits in an hour or so.

--D

[Sixiao Guo]

Thanks Dustin! Are you submitting the final version to Bernardo, or is Daniel handling that? 

[Dustin Goot]

We can do it either way. I'm hoping to send something around at 9, but I'm struggling to find the right phrasing for this taxi medallion problem. Also, I think we need to adjust the graphs slightly for that. Basically, we've assumed that the supply curve follows the line of the regulated fare price. I'm pretty sure this is incorrect.

The supply curve should follow the level of marginal cost, which should remain unchanged in both scenarios. What happens is that the taxi commission sets a price that is somewhere between the supply curve (MC) and the equilibrium fare (the place where the vertical part of the supply curve intersects demand). The idea is that it has to compensate for the massive fare its supply shortage would cause by pushing the fare back down to a normal level. However, since the taxi drivers are well-organized politically, the regulated fare probably allows them to get above-normal profits.

Does that make sense? Maybe I can take an iPhone pic of my revised graph and send around.

--D

[Daniel Zarovy]

Hey Dustin,

Can you send what you have so far?  Also, I can update the supply curve if you send a pic.

Thanks,
Daniel

[Dustin Goot]

You'll see I've retracted my original opinions about how the taxes work in #4 (you were totally right that it was fishy). That problem is actually solved, minus the ad valorum stuff, on page 479 in the book. I'm pretty sure the ad valorum doesn't affect the deadweight loss, as I've now noted. You should just show the same triangle for both schemes.

Sending taxi pic now.

--D

[Daniel Zarovy]

Hey Dustin,

I attached a version with the updated charts.  Hope that's what you were looking for.  Let me know if you figure out that ad-valorem tax amount.  I'll give it a shot as well.

Later,
Daniel

[Dustin Goot]

Looks good. On the ad valorum tax, you should keep the shifted demand line in there and I found a graph where we were actually rotating it around the wrong point. It should swing back from the x-intercept, not the y. (Intuition being, when the price is zero, there is no difference in demand with or without tax -- as you move up and left along the demand curve, the spread between the curves increases because it's a percentage of price.) The deadweight loss is the same triangle because it's still just the difference between the demand curves at the point where the lower curve crosses supply.

Also, on 4b, we should add this sentence just to answer the whole question. "The price increases by $8. Thus, 40% of the tax was passed on."

Still trying to solve the ad valorum thing ...

--D