Instructions In Each Of The Problems Listed Below You Are Re

Instructionsin Each Of The Problems Listed Below You Are Required To

Instructions: In each of the problems listed below you are required to write a report defining the problem and providing alternative solutions. You can use graphs and mathematical models to help you simplify the problems and assist you in making optimal decisions. Make sure that your report is clear, relevant and well organized. The report must be type-written and double-spaced.

1. You are an aide for the Senate Banking Committee Chairman. He comes to you with a bill that proposes setting limits on what ATM owners can charge non-account holders, over and above what banks charge their own customers. Currently, large banks charge noncustomers an average fee of $1.35 per transaction in addition to the fees the customer’s own bank imposes. The Senator asks you to look at a proposal that would place a $0.50 cap on the fees ATM owners can charge noncustomer for accessing their money. If this legislation is enacted, what would be the likely effects?

2. Suppose you are an aide to a U.S. Senator who is concerned about the impact of a recently proposed excise tax on the welfare of her constituents. You explained to the Senator that one way of measuring the impact on her constituents is to determine how the tax change affects the level of consumer surplus enjoyed by the constituents. Based on your arguments, you are given the go-ahead to conduct a formal analysis, and obtain the following estimates of demand and supply: and .

a. Graph the supply and demand curves.

b. What are the equilibrium quantity and equilibrium price?

c. How much consumer surplus exists in this market?

d. If a $2 excise tax is levied on this good, what will happen to the equilibrium price and quantity?

e. What will the consumer surplus be after the tax?

3. You are the manager of a 24-hour copy shop that is closed on Sundays. You lease a building for $2,000 per month and hire three employees who each work eight-hour shifts at a wage of $10.00 per hour. The markets for labor and office space are tight in your area. To acquire the lease and hire workers, you signed contracts requiring you to give 12 months advance notice before abandoning your lease or laying off workers (if you fail to comply, the contracts force you to fully compensate your landlord and workers for the income they otherwise would have earned over the 12-month period).

Paper costs you $.02 per sheet. You currently sell 500,000 color copies per year at a price of $.10 per copy and 1,000,000 black and white copies per year at a price of $.05 per copy. Because of your high volume, each of your two copiers has a useful life of only one year. You just received a call from an employee who informs you that your color copier just broke down. The good news is that your black and white copier is brand-new; the bad news is that a new color copier will cost $30,000.

Should you purchase a new color copier? Assume that customers who want color copies are unwilling to substitute black and white copies.

Paper For Above instruction

In this comprehensive analysis, we explore three distinct economic scenarios involving regulatory policy, taxation impact, and capital investment decisions, demonstrating the application of economic principles such as consumer surplus, supply and demand, and cost-benefit analysis.

1. The Impact of Limiting ATM Fees on Consumer Welfare and Banking Competition

The current landscape of ATM fees reveals an average charge of $1.35 for non-customers, over and above bank-imposed fees, which impacts consumer choices and market competition. A proposal to cap ATM surcharge fees at $0.50 aims to mitigate consumer costs and promote fairness.

Implementing this cap would have several implications. First, ATM owners, predominantly large banks, might experience reduced revenue from non-customer transactions. This revenue reduction could lead to decreased investment in ATM infrastructure or a shift towards alternative fee structures. Some banks might choose to absorb the fee reduction rather than pass it on, impacting their profitability.

Second, the cap might discourage ATM proliferation in areas where profitability was marginal. ATM operators might reduce the number of machines or relocate them to areas with higher transaction volumes or user fees. This could potentially decrease ATM accessibility in less profitable areas, affecting consumers who rely on ATMs in those regions.

Additionally, the legislation might induce competition in the fee structure, prompting banks to develop alternative cost-sharing or fee models for non-customers, possibly leading to innovation in transaction fees or bundling of banking services.

Overall, the likely effect of imposing a $0.50 cap would be to lower consumers' transaction costs while pressuring ATM operators' revenue streams. The market may shift toward more efficient fee structures and expanded access, but there is also a risk of reduced infrastructure or increased operational costs for banks, which could be passed on to consumers indirectly or impact service availability.

2. Analyzing the Impact of a Tax on Consumer Surplus

The analysis involves examining how a $2 excise tax influences market equilibrium and consumer welfare, measured through consumer surplus. Assuming linear demand and supply functions, we first graph the curves, determine equilibrium, and compute consumer surplus.

The demand function declines as price increases, reflecting consumer willingness to buy fewer units at higher prices. Conversely, the supply function increases with price, representing producers' willingness to supply more at higher prices. The intersection defines market equilibrium.

Before the tax, the equilibrium quantity and price can be derived from the demand and supply equations. Consumer surplus is the area between the demand curve and the equilibrium price, representing the benefit consumers receive beyond payment for goods.

When a $2 excise tax is introduced, the supply curve shifts upward by $2, resulting in a higher equilibrium price paid by consumers and a lower equilibrium quantity. Consumers face higher prices, reducing consumer surplus directly. The new consumer surplus can be calculated as the area above the new equilibrium price up to the demand curve.

Quantitatively, the reduction in consumer surplus reflects the loss of welfare due to the tax, which is a typical outcome in taxation policy analysis. The size of this welfare loss helps policymakers evaluate the efficiency and equity impacts of taxation.

3. Capital Budgeting Decision: Replacing a Broken Color Copier

The decision to purchase a new color copier hinges on a cost-benefit analysis considering current equipment, costs, and customer demand. The key factors include the cost of the new copier ($30,000), the useful life (one year), and the demand for color copies which is non-substitutable by black and white copies.

Current sales are 500,000 color copies annually at $0.10 each, generating $50,000 in revenue, and 1,000,000 black and white copies at $0.05 each, with annual revenue of $50,000. The paper cost per sheet is $0.02. The total annual paper cost for color copies is $10,000, and for black and white copies is $20,000.

If the existing color copier breaks down and the decision is to replace it, the incremental cost of buying the new $30,000 copier must be weighed against the revenue generated and the strategic importance of color copying. Since customer demand for color copies is high and non-substitutable, the loss of the color copier would reduce revenue significantly, adversely affecting customer satisfaction and potentially decreasing overall revenue.

Given that black and white copies do not substitute for color copies, the loss of color service might lead to a loss in customer goodwill and potential revenue decline. The cost of the new copier, considering its annual depreciation and operational costs, should be justified by the additional revenue from color copies and the importance of maintaining service quality.

Based on this analysis, purchasing a new color copier appears justified if the expected revenue from color copying surpasses the amortized cost of the equipment, including operational expenses. As the paper costs are manageable and demand is inelastic, investing in the new copier sustains service quality and profitability.

References

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