Assignment: Economics of Decision-Making

Instructions:

-Label the axes of any graphs you draw
-Adhere to the page limits
-Format is either double space, 12 point font, 1 inch margins
-you may draw graphs by hand and insert a picture of the graph into your document

1. Assume that the markets for sugar cane, rum, and whiskey are initially in equilibrium. Assume further that a plague destroys much of the world sugar cane crop. Sugar cane is a principal ingredient in rum, but it is not an ingredient in whiskey. Analyze the effect of the plague on the markets for each of the three goods. In other words, what effect does the hurricane have on the market for sugar cane, the market for rum, and the market for whiskey? Does the plague increase or decrease revenues for sugar growers, rum producers and whiskey producers? Describe the conditions that affect the answer to this question. This question requires graphs.

2. Assume that the market for labor is perfectly competitive, and that authorities institute the following policy: All workers should have health insurance, and the employer should pay for 100% of each worker's insurance policy (assume that the cost of the policy is the same for every worker). Use graphical and economic analysis to evaluate the effects of this policy on the surpluses of workers, employers, and society as a whole. Who are the winners and losers? Do workers necessarily benefit from this policy? Why or why not? Explain. This question requires a graph.

3. The Homo Economicus assumption states that "individuals act in a rational and self-interested manner, and have the ability to make judgments to achieve their subjectively defined ends." In theory, this means that consumers and producers act as if solving optimization problems to maximize their utility or profit. Explain why, from a practical standpoint, this may or may not be a good assumption. Give an example (from either the consumer or producer side) to support your answer. A graph is not required in your answer.

4. In an August, 2016 Working Paper, Steven Levitt et. al. calculate price elasticities of demand for Uber. The elasticities were estimated at times when surge prices went into effect. Table 4 reproduced on the page below shows the estimated elasticities. The estimates are the negative numbers. The standard errors are in parentheses.

a. What patterns are present in these elasticities? Are they consistent with what you would intuitively expect? Explain.

b. What do you think explains the differences or similarities across the city specific elasticities?

c. Which consumers are getting the biggest consumer surplus from Uber? How do you know? Could Uber take advantage of the information on consumer surplus? How?

d. Based on these elasticities, (i) should uber raise or lower surge prices to maximize revenue? (ii)suggest some changes Uber can implement going forward to increase their profitability.

Attachment:- Assignment.rar