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Applied Economics for Management - Assignment 1 (50 Marks)

If the interest rate is 10%, what is the present value of the Abbot Corporation’s profits in the next 10 years? (5 marks)
Years Profit (millions of dollars)
1 8
2 10
3 12
4 14
5 15
6 16
7 17
8 15
9 13
10 10

A drama company in Toronto believes the demand for its performances is closely approximated by the following function:
Q = 1,000 – 100P
Where Q is the number of patrons purchasing tickets and P is the price per ticket. The current price is $50. At a recent board meeting, some members felt the price should be lowered to encourage more attendance. Others argued a higher price was necessary to raise more revenues. Reconcile these two different points of view. What might you say if you were involved in the discussion? (10 marks)

Suppose the minimum wage is $3.65 per hour, and at that wage rate there are 10 million people in the market who would like to work. Further, suppose that over a wide range of wages that if the wage rate goes up by 10 percent. Next, suppose that 6 million of these people actually have jobs. That is, at $3.65 per hour, the quantity demanded of unskilled labor is 6 million workers. Assume that a 10 percent increase in the wages paid to workers reduces the number of workers hired by 20 percent. First, what is the unemployment rate? Suppose the minimum wage were reduced to $3.50 per hour. What would happen to the unemployment rate in the labour force? (10 marks)

If the demand curve for wheat in Canada is:
P = 12.4 – 4Qd
Where P is the farm price of wheat (in dollars per bushel) and Qd is the quantity of wheat demanded (in millions of bushels), and the supply curve for wheat in Canada is
P = -2.6 + 2Qs
Where Qs is the quantity of wheat supplied (in millions of bushels).
What is the equilibrium price of wheat? What is the equilibrium quantity of wheat sold? Must the actual price equal the equilibrium price? Why or why not? (5 marks)

5. In early August 1990, the price of gasoline in the US was about $.90 a gallon, and the consumption was about 10million barrels, or 420 gallons. The events in the Persian Gulf altered that situation dramatically. Gasoline prices rose to more than $1.20 per gallon in a very short time.
Assume that the heightened cost of crude oil reduced the supply of gasoline by 25 percent. Furthermore, assume that the short-term price elasticity of demand for gasoline is -.75. Similarly, the short-term elasticity of supply is +.75.
Many people in the US at the time felt that the price increases for gasoline were unwarranted and that the public was being gouged by the oil companies. Here is the question: Suppose that the supply of gasoline did actually decline by 25% and demand did not change. Furthermore, suppose that oil companies had “acted with restraint” in raising prices and only raised the price of gasoline to $1.00 per gallon. Describe the situation in the retail market for gasoline. Be specific. (10 Marks)
What would the quantity demanded be?
What would the quantity supplied be?
Would the market be in equilibrium? If not, how would the market look? What would be the repercussions?

6. According to an article in China Daily, China recently accelerated its plan to privatize a large number of state-owned firms. Imagine you are an aide to a consultant who has been asked to help the committee determine the price and quantity that will prevail when the market is allowed to adjust freely. The best estimates of the market demand and supply for the good (in $ equivalent prices rather than in Yuan) are given by:
Qd=10-2P and Qs=2+2P
What is equilibrium price and quantity?
If the Chinese government decides that the ‘free market’ price from (a) is too high for the typical Chinese citizen to pay, and they decide to set a maximum price in the market of $1.50, explain what would happen in the market.
Now assume that a member of the Chinese government is worried that producers will not be earning a ‘fair rate of return’ if they are restricted to the set price of $1.50. Explain what would happen if the Chinese government privatized the market, but agreed to purchase unsold units of the good and set the market price at $4.00. (10 Marks)