ECO101: Principles of Microeconomics

gov’t interventions & production

workshop

Robert Gazzale, PhD

Department of Economics
University of Toronto
robert.gazzale@utoronto.ca

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 elasticities, incidence and pass-through, oh my!

a question
Blah, blah, blah competitive market. Yada, yada, yada. Blah, blah,
blah. Yada, yada, yada. Blah, blah, blah. Yada, yada, yada. Blah, blah,
blah. Yada, yada, yada. If blah, blah increases the marginal cost of
every item produced by $10, what happens to equilibrium price and
quantity?

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 elasticities, incidence and pass-through, oh my!

the same basic question

Vibranium is sold in a competitive market. In 2036, the market price is
$100, elasticity of demand is 0.4 and elasticity of supply is 0.8. If in
2037, the government implements a $10 per unit tax, payable by the
seller, what happens to equilibrium price and quantity?

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 elasticities, incidence and pass-through, oh my!

the multiple-choice question

Vibranium is sold in a competitive market. In 2036, the market price is
$100, elasticity of demand is 0.4 and elasticity of supply is 0.8. If in
2037, the government implements a $10 per unit subsidy, payable to
the buyer, the equilibrium market price will be .
a $110
b greater than $105 but less than $110
c $105
d greater than $100 but less than $105
e $100

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 scenario a

scenario a: expanded unemployment benefits

In response to the arrival of the pandemic, many countries responded
by increasing the generosity unemployment insurance (UI), both in
terms of number of benefit weeks and amount per week.
1 How do expanded unemployment benefits affect labour demand?
2 How do expanded unemployment benefits affect labour supply?
3 June 21, 2021: 22 U.S. states ended all supplemental UI: 1 million
lost all UI, 2 million had payments reduced by $300 per week.
Economists (including UofT’s Prof. Stepner) find that employment
in these states increased little relative to states not ending
supplemental payments.
a How might we explain this small response?
b How and how might we depict this small response in your graph(s)?

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 scenario a

scenario a: expanded unemployment benefits

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 scenario b

scenario b: a TFU
Materials cost $10 per unit produced, and labour costs $25 per unit
hired. The per-period rental price is $100,000 for machine A or
$200,000 for machine B. To produce 100,000 units:
machine A 100 workers where MPL(100)=800; or
machine B 150 workers where MPL(150)=1200.
TFU: The marginal cost at q = 100, 000 is lower with machine A than
with machine B.

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 scenario b

scenario b: a TFU

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 scenario c

scenario c: production costs: a case study

“Is This the Future of New York’s Coffee Carts?” Grub Hub.

1 Blank Street poured a lot of effort into reducing costs. For each
example you find in the article, identify the affected cost curves.
2 Assume Blank Street pays its workers a higher wage than
Starbucks and its coffee beans cost more than those used by
Starbucks. TFU: Blank Street incurs a higher marginal cost per
coffee drink than Starbucks.
3 Based on the information in the article, how would a Blank Street
MPL curve compare to the MPL of a standard Starbucks location?
Explain.
4 Based on the information you have, how would the MC and ATC
curves for a Blank Street location compare with the MC and ATC
curves for a standard Starbucks? Explain.

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 scenario c

scenario c: production costs: a case study

“Is This the Future of New York’s Coffee Carts?” Grub Hub.

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