Suggestions for mixed bag II

The suggestions for the mixed bag are organized by problem.

Problem 1: If the wage rate rises by 20% and labor is the only variable cost of production, what is the percentage change in total variable costs at every level of output? What effect will the 20% rise in the wage rate have on fixed costs? If need be, construct a numerical example to answer these questions. Based on the answers to these questions, you should be able to derive the effects of the wage increase on the various cost curves referred to in individual questions 1-4 and individual question 6. Individual questions 5, 7, 8, and 9 deal with how much the firm will supply after the increase in wage rates under different conditions about the price of the firm’s output. You can answer these questions by first answering the following questions. Assuming it is profitable to supply a positive level of output, what cost schedule determines the profit-maximizing level of output that will be supplied at a given price? What happens to this schedule as a result of the 20% increase in the wage rate? If the price of output also increases by 20%, what happens to the profit-maximizing level of output? Analyze this last question graphically based on the cost schedule(s) that determine the profit-maximizing level of output. If the price of output does not increase at all or by less than 20%, what happens to the profit-maximizing level of output in your graph? Under what condition would a firm shut down? Can you tell whether this condition would be satisfied if the price of output did not change?

Problem 2: You are told that doubling the tax from \$1 to \$2 will cause the price of whiskey to rise from \$10 to \$11. What effect would you expect this to have on the quantity demanded? How would the change in the quantity demanded affect whether the state would double its revenues from the tax? The answers to these questions should enable you to answer individual questions 10 and 11. In the other individual questions, you are given information about the price or income elasticity of demand. What does the income elasticity of demand tell you about how the increase in the tax and the resulting increase in price will affect total consumer expenditures on whiskey? The answer to this question should enable you to answer individual question 13. In the other two individual questions, you need to think about how knowledge about the price elasticity of demand can be used to assess whether the tax increase will lead to an increase in the total tax revenues taken in by the state. If the tax per unit doubles, by how much can the quantity demanded fall and the total tax revenues taken in by the state still increase? How can you use the price elasticity of demand coupled with the magnitude of the price increase to ascertain whether the decrease in the quantity demanded will be such that the total tax revenues taken in by the state will increase?