Explain and illustrate how excise taxes, ad valorem taxes, price floors, and price ceilings impact the functioning of a market.

Extract 1 Oil price changes

“The oil price drop since June 2014 was due to supply and demand factors. USA oil production doubled between 2009 and 2015. Countries such as Algeria, Saudi Arabia and Nigeria used to export oil to the USA but now the USA produces more than enough oil to meet its own needs. Furthermore, in 2014 OPEC producers decided not to reduce production and as a consequence by August 2015 the oil price decreased 40%.

Oil is a non-renewable resource and reserves of oil are finite. However, oil producing countries are massively extracting oil. Investment in renewable resources and in new solar and wind power capacity is being cut as subsidising these activities has become a burden to governments.

Currently, the demand for petrol and diesel is decreasing. Part of the reason for this decrease is the weak economic growth in much of Europe and also in developing countries, causing real incomes to grow slowly. Furthermore, new cars and new trucks are becoming more energy efficient with lower requirement for diesel and petrol.

New cars now burn less fuel causing less air pollution. This contributes to reduce the pressure on healthcare. For example, those with respiratory diseases are less likely to need treatment. Nevertheless, many people in developing countries drive old cars that are less fuel efficient. Also, increased numbers of drivers may offset the gains in fuel efficiency.”

1. Consider the factors that have contributed to the change of oil price according to Extract 1, and explain how they have affected the demand and supply of oil, and the final impact on oil price. No need of drawing graphs.

Say good X tends to be a relatively price-elastic good (demand is more price elastic than supply). Say the government imposes an excise tax on every unit of X buyers buy. The burden of this tax will probably fall more heavily on:

sellers (gas stations)

hard to say

both sellers and buyers equally

buyers

3. Let's think about the house price. According to the Case-Shiller Home Price Indices in August 2009, Chicago and San Francisco have following sample mean and population standard deviations (the sample mean was calculated by daily base, so the sample size was 30):

1. Using hypothesis test, prove if these house price indices are same. (Setup a hypothesis, show your works to perform the test, and state your verdict)
2. Some people argue that San Francisco has higher house price than that of Chicago. Prove/disprove the argument using a hypothesis test.
3. Let’s assume the population standard deviations are unknown, and the sample standard deviation of for Chicago is 9.2 and that of San Francisco is 11.5. Some people argue that San Francisco has higher variability (higher variance) in house prices than that of Chicago. Setup a hypothesis, perform the test and prove/disprove the argument.

(From The Consumer Price Indexes Web site) The Consumer Price Index (CPI) measures the average change over time in the prices paid by urban consumers for consumer goods and services. The CPI affects nearly all Americans because of the many ways it is used. One of its biggest uses is as a measure of inflation. By providing information about price changes in the Nation’s economy to government, business, and labor, the CPI helps them to make economic decisions. The President, Congress, and the Federal Reserve Board use the CPI’s trends to formulate monetary and fiscal policies. In the following table, x is the year and y is the CPI.

xy

1915 10.1

1926 17.7

1935 13.7

1940 14.7

1947 24.1

1952 26.5

1964 31.0  

1969 36.7

1975 49.3

1979 72.6

1980 82.4

1986 109.6

1991 130.7

1999 166.66

Answer from your excel sheet:

Write the equation in the form y= a + bx.  Round "a" to the nearest whole number, round "b" to 2 decimal places from your Excel sheet.  _____

Find the correlation coefficient from your Excel sheet. To 2 decimal places.  _____

Is it significant?  _____ (yse or no)Use http://www.socscistatistics.com/pvalues/pearsondistribution.aspx to calculate the significance with significance level 0.05.

What is the CPI for the year 1990? Use your equation in a) and round to the nearest whole number.

7. Use the following table to answer the questions below.

Quantity Consumed                   Total Utility                    Total Utility

     (per week)                            of Pizza                       of Pepsi

            0                                         0                                     0

            1                                     242                                 668

            2                                     552                               1200

            3                                     792                               1632

            4                                     996                               2016

            5                                 1176                               2316

            6                                 1344                               2556

            7                                 1506                               2712

            8                                 1626                               2736

            9                                 1728                               2664

            10                                 1818                               2448

Answer the following questions. Assume that the price of pizza is $1 per slice and the price of a large Pepsi is $2.

1.         Calculate the marginal utility of each unit of pizza and Pepsi.

2.         Using the prices mentioned above, calculate the marginal utility per dollar of pizza and Pepsi.

3.         With $20 to spend per week, what amount of pizza and Pepsi will maximize satisfaction?
   (Find the utility-maximizing combination of pizza and Pepsi).

4.         What is the total amount of utility from the combination computed in part C, i.e. the total utility from the pizza
               slices plus the total utility from Pepsis?

5.         Given your answer in C, explain why buying two more slices of pizza and 1 less Pepsi makes the person
               worse off.

Calculating Price Using a Markup Percentage of Cost

Lake McDonald Gift Shop has decided to price the games that it sells at cost plus 60%. The National Parks Memory Card Game costs $15.00 each, and another one, the Guess This Animal Track Game, costs $1.50 each.

Required:

1. What price will Lake McDonald Gift Shop charge for each National Parks Memory Card Game? If required, round your answer to two decimal places.
$

2. What price will Lake McDonald Gift Shop charge for each Guess This Animal Track Game? If required, round your answer to two decimal places.
$

4. Using annual stock price between 2013 and 2018, compute the following returns. For stock price data, use the closing price of last trading day of the year:

1) Arithmetic Average Return5. Using annual stock price between 2013 and 2018, compute the following returns. For stock price data, use the closing price of last trading day of the year:

r1 + r2 + r3 + r4 / 5

Honda:

Ford:

2) Geometric Average Return

(1 + rg) 4 = (1 + r1) x (1 + r2) x (1+r3) x (1 + r4)

Honda:

Ford:

3) Holding Period Return

(1 + r1) x (1 + r2) x (1+r3) x (1 + r4) - 1

Honda:

Ford:

4) 2-year forecast Return

R(T) = (T-1 / N-1) x Geometric Average + (N-T / N-1) x Arithmetic Average

Honda:

Ford:

5) 3-year forecast Return

R(T) = (T-1 / N-1) x Geometric Average + (N-T / N-1) x Arithmetic Average

Honda:

Ford:

5. Using annual stock price between 2013 and 2018, compute the following returns. For stock price data, use the closing price of last trading day of the year:

1) Arithmetic Average Return

r1 + r2 + r3 + r4 / 5

Honda:

Ford:

2) Geometric Average Return

(1 + rg) 4 = (1 + r1) x (1 + r2) x (1+r3) x (1 + r4)

Honda:

Ford:

3) Holding Period Return

(1 + r1) x (1 + r2) x (1+r3) x (1 + r4) - 1

Honda:

Ford:

4) 2-year forecast Return

R(T) = (T-1 / N-1) x Geometric Average + (N-T / N-1) x Arithmetic Average

Honda:

Ford:

5) 3-year forecast Return

R(T) = (T-1 / N-1) x Geometric Average + (N-T / N-1) x Arithmetic Average

Honda:

Ford:

Today's price for a 1-year, zero-coupon risk-free bond is $983.25, and the price of a 2-year, zero-coupon risk-free bond is $906.46. What should be the price of a risk-free, 2-year annual coupon bond with a coupon rate of 2.0%? Round your answer to the nearest penny (i.e., two decimal places).