Lab 14 Agricultural and Resource Economics (ARE 201) Name: Section #:

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1 Lab 4 Agricultural and Resource Economics (ARE 2) Name: Section #: This lab assignment is worth oints. You are to comlete this assignment and have it to me by the due date secified in the weekly assignment. Late lab assignments will not be acceted without rior arrangement with me. Please let me know if you need any hel with this assignment. Good Luck! Purose of Lab: This assignment will examine the elasticity of demand, suly, and income and teach you how to analyze the cost of labor. Assignments: Examining the Elasticity of Demand, Suly, and Income. The rice elasticity of demand tells how much a % change in the rice for a commodity will affect the uantity demanded of the commodity. It measures the resonsiveness of the uantity demanded of a commodity to a change in the rice for the commodity. For examle, let's assume that the rice elasticity of demand for a commodity is 6. In this case, the uantity demanded of the commodity will increase by 6% if the rice for the commodity falls by %. You should note that the relationshi between a change in the rice for a commodity and the uantity demanded of the commodity is inverse, which is in accordance with the Law of Demand. The rice elasticity of demand can be calculated using two airs of oints on the demand curve for the commodity. In general, if (, ) and (, ) are the coordinates of two airs of oints on a demand curve, the average rice elasticity of demand for the commodity in the region enclosed by the oints is calculated as follows: You may want to see Lab 8 to review the mathematics of ercents and ercent changes.

2 2 ε d % Change in Quantity Demanded % Change in the Price for the Commodity For examle, let's calculate the average rice elasticity of demand for a commodity in the region enclosed by the oints (2, 8) and (4, 4) on the demand curve for the commodity: ε d The rice elasticity of demand varies along the length of the demand curve for the commodity. That is, the rice elasticity of demand at one oint on a demand curve is different from the elasticity at another oint. This means that the resonsiveness of the uantity demanded of a commodity to a change in the rice for the commodity deends on the rice for the commodity (i.e., the location on the demand curve). Figure demonstrates how the rice elasticity of demand varies along the length of a demand curve. In reference to Figure, you should note that the demand curve deicted has been bisected at the center of the curve. The demand for a commodity is said to be elastic in a given region of a demand curve if the absolute value of the rice elasticity of demand in the region is greater than. 2 As shown in Figure, the elasticity of demand for a commodity is elastic in the to half of the demand curve for the commodity. A demand curve is said to be unit elastic at a given oint on a demand curve if the absolute value of the rice elasticity of demand at the oint is eual to. As shown in Figure, the elasticity of demand for a commodity is unit elastic at the center of the demand curve for the commodity. 2 The absolute value of a ositive number is eual to the number itself. For examle, the absolute value of 6 is eual to 6. The absolute value of a negative number is eual to the roduct of the number and (i.e., dro the negative sign). For examle, the absolute value of 7 is eual to 7. If the symbols enclose a number, you are to calculate the absolute value of the number inside the symbols (e.g., 6 6 and 7 7).

3 3 Price ε d > elastic region Demand Curve ε d unit elastic oint Center of the Demand Curve ε d < inelastic region Quantity Figure : Elasticity Along a Demand Curve The demand for a commodity is said to be inelastic in a given region of a demand curve if the absolute value of the rice elasticity of demand in the region is less than. As shown in Figure, the elasticity of demand for a commodity is inelastic in the bottom half of the demand curve for the commodity. The factors that affect the sloe of the demand curve for a commodity have the same tye of effect on the rice elasticity of demand for the commodity. This is because the elasticity of demand for a commodity is an indirect measurement of the sloe of the demand curve for the commodity. For examle, the absolute value of the rice elasticity of demand for a commodity usually becomes larger or more elastic with time just as the sloe of the demand curve for the commodity becomes flatter or more elastic with time. You may want to see Lab 3 to review the factors that affect the sloe of the demand curve for a commodity or the rice elasticity of demand for the commodity. There is a relationshi between the rice elasticity of demand for a commodity and the revenue that is received from the sale of the commodity. This relationshi is demonstrated in Figure 2.

4 4 Price ε d > elastic region Demand Curve ε d unit elastic oint ε d < inelastic region Quantity Total Revenue Total Maximum Revenue Total Revenue Quantity Figure 2: Relationshi Between Price Elasticity of Demand and Total Revenue

5 5 The table below summarizes the relationshi between the rice elasticity of demand for a commodity, the rice for the commodity, and the revenue that is received from the sale of the commodity. Before you roceed, you should make sure that you understand how the information in the table is derived from Figure 2. Region of Demand Curve Numerical Value of Elasticity Change in the Price for the Commodity Change in the Revenue from the Commodity elastic > elastic > unit elastic none unit elastic none inelastic < inelastic < Please answer the uestions below. You may want to refer to your notebook, lecture notes, textbook, and ast lab assignments.. What is the rice elasticity of demand for a commodity if a 2% increase in the rice for the commodity is associated with a 6% decrease in the uantity demanded of the commodity: a) 2 b) 3 c) 6 d) 2 2. What would be the ercent change in the uantity demanded of a commodity that is associated with a 4% decrease in the rice for the commodity if the rice elasticity of demand for the commodity is 8: a) 4% b) 8% c) 6% d) 32%

6 6 3. What would be the ercent change in the rice for a commodity that is associated with a % decrease in the uantity demanded of a commodity if the rice elasticity of demand for the commodity is : a) % b) 2% c) 5% d) % 4. Calculate the average rice elasticity of demand for a commodity in the region enclosed by the oints (2, 5) and (42, 2) on the demand curve for the commodity: a) 4 b) 5 c) 2 d) 5 5. The absolute value of the rice elasticity of demand for the commodity whose demand curve is deicted below could have the following value at oint A on the demand curve: a).2 b).99 c) d) 2 Price "A" is in the elastic section of the demand curve. A Demand Curve Quantity

7 7 6. The following factor could indicate that the rice elasticity of demand for a commodity is elastic: a) consumers' exenditures on the commodity account for a small roortion of their budgets b) the eriod under analysis covers the short run c) the commodity has few substitutes d) all of the above 7. If the total revenue from the sale of a commodity increases when the rice for the commodity is droed, the rice elasticity of demand for the commodity is: a) elastic b) unit elastic c) inelastic d) not enough information to answer uestion 8. If the rice elasticity of demand for a commodity is inelastic, an increase in the total revenue form the sale of the commodity would be due to: a) lower rice b) same rice c) higher rice d) not enough information to answer uestion 9. If the rice elasticity of demand for a commodity is unit elastic, a dro in the rice for the commodity would have the following effect on the total revenue from the sale of the commodity: a) less revenue b) same revenue or no effect c) more revenue d) not enough information to answer uestion. If the total revenue from the sale of a commodity rises at the same time that the uantity demanded for the commodity falls, the rice elasticity of demand for the commodity would be: a) elastic b) unit elastic c) inelastic d) not enough information to answer uestion

8 8. If the rice elasticity of demand for a commodity is elastic and the uantity demanded for the commodity increases, the total revenue from the sale of the commodity would: a) decrease b) stay the same c) increase d) not enough information to answer uestion Consider the demand schedule below for Canadian hemlock trees. Demand Schedule Quantity Demanded Price 5, $35, 3 5, 25 2, 2 25, 5 3, 35, 5

9 9 2. Grah the demand schedule for hemlock trees in the first xy lane given below. Label the three distinct areas of elasticities on the demand curve. Grah the total revenue from the sale of hemlock tress and the uantity demanded of hemlock trees in the second xy lane given below. Plot the total revenue from the sale of hemlock tress on the yaxis. Demonstrate the relationshi between the rice elasticity of demand for hemlock trees, the rice for hemlock trees, and the total revenue from the sale of hemlock trees by linking the two grahs in this exercise with dashed lines. Pick the right grah. A) Grah A B) Grah B C) Grah C Price 35 3 (5,35) > elastic ε d region Demand Curve unit ε d elastic < inelastic region ε d (35,5) Total Revenue Total Maximum Revenue Quantity Total Revenue Quantity Grah A

10 Price 35 3 (5,35) < inelastic ε d region Demand Curve unit ε d elastic > elastic region ε d (35,5) Total Revenue Total Maximum Revenue Quantity Total Revenue Quantity Grah B

11 Price 35 3 < inelastic ε d region Demand Curve (35,5) 25 2 unit ε d elastic 5 5 > elastic ε d (5,35) region Total Revenue Total Maximum Revenue Quantity Total Revenue Quantity Grah C 3. Let's assume that the market clearing uantity of hemlock trees is 25, trees. Under these circumstances, would you advice the hemlock tree industry to exand the suly of hemlock trees? A) YES B) No The income elasticity of demand for a commodity tells how much a % change in consumer disosable income will affect the uantity demanded of the commodity. It measures the resonsiveness of the uantity demand of a commodity to a change in consumer disosable income. It tells us how much the demand curve for a commodity shifts when there is a change in consumer disosable income and the direction in which the demand curve shifts.

12 2 For examle, let's assume that the income elasticity of demand for a commodity is 2. 3 In this case, the uantity demanded of the commodity will increase by 2% if the disosable income of consumers increases by %. There is an increase in the demand for the commodity in this examle since the income elasticity of demand for the commodity is a ositive number. The income elasticity of demand for a commodity is calculated as follows: y % Change in Quantity Demanded % Change in Disosable Income i i i i εd i i where, i i uantity demanded of the commodity level of consumer disosable income when the uantity demanded of the commodity is level of consumer disosable income when the uantity demanded of the commodity is For examle, let's suose that the uantity demanded of a commodity is 6 units when the disosable income of consumers is 2 units. On the other hand, the uantity demanded of the commodity is units when the disosable income of consumers is 3 units. Under these circumstances, the income elasticity of demand is calculated as follows: y ε d i i i If the uantity demanded of a commodity varies directly with the disosable income of consumers, the commodity is classified as a normal good. In this case, the income elasticity of demand for the commodity is a ositive number. 3 The income elasticity of demand for a commodity may be ositive or negative deending on the articular commodity under consideration. The mathematical sign associated with the income elasticity of demand for a commodity is always reorted (i.e., + or ). Do not use the absolute value of the income elasticity of demand in working roblems.

13 3 If the uantity demanded of a commodity varies inversely with the disosable income of consumers, the commodity is classified as an inferior good. In this case, the income elasticity of demand for the commodity is a negative number. If the income elasticity of demand for a commodity is greater than or eual to, the commodity is classified as a luxury good. If the income elasticity of demand for a commodity is between and, the commodity is classified as a necessity. Please answer the uestions below. You may want to refer to your notebook, lecture notes, textbook, and ast lab assignments. 4. What is the income elasticity of demand for a commodity if a 2% increase in consumer disosable income is associated with a 6% dro in the uantity demanded of the commodity: a) 2 b) 2 c) 3 d) 3 5. What would be the ercent change in the uantity demanded of a commodity that is associated with a 5% increase in consumer disosable income if the income elasticity of demand for the commodity is 4: a) 4% b) 5% c) 2% d) 2% 6. What would be the ercent change in consumer disosable income that is associated with a % dro in the uantity demanded of a commodity if the income elasticity of demand for the commodity is : a) % b) % c) % d) %

14 4 7. Let's suose that the uantity demanded of a commodity is 2 units when consumer disosable income is 2 units. The uantity demanded of the commodity is 8 units when consumer disosable income is units. What is the income elasticity of demand for the commodity: a) 3 b) 3 c) 6 d) 6 8. If an 8% increase in consumer disosable income is associated with a % dro in the uantity demanded of a commodity, the commodity would be classified as: a) normal good b) inferior good c) abnormal good d) not enough information to answer uestion 9. Which one of the following goods is likely to have an income elasticity of demand greater than : a) food b) gasoline c) household cleaning sulies d) travel trailer The rice elasticity of suly tells how much a % change in the rice for a commodity will affect the uantity sulied of the commodity. It measures the resonsiveness of the uantity sulied of a commodity to a change in the rice for the commodity. For examle, let's assume that the rice elasticity of suly for a commodity is 3%. In this case, the uantity sulied of the commodity will increase by 3% if the rice for the commodity rises by %. You should note that the relationshi between a change in the rice for a commodity and the uantity sulied of the commodity is direct, which is in accordance with the Law of Suly. The mathematical sign of the rice elasticity of suly for a commodity is always ositive. The rice elasticity of suly can be calculated using two airs of oints on the suly curve for the commodity. In general, if (, ) and (, ) are the coordinates of two airs of oints on a suly curve, the average rice elasticity of suly for the commodity in the region enclosed by the oints is calculated as follows:

15 5 ε s % Change in Quantity Sulied % Change in the Price for the Commodity For examle, let's calculate the average rice elasticity of suly for a commodity in the region enclosed by the oints (, 2) and (8, 2) on the suly curve: ε s The relationshi between the rice elasticity of suly for a commodity and the shae of the suly curve for the commodity is demonstrated in Figure 3. You should note that a suly curve that intercets the origin of the xy lane is classified as unit elastic. The numerical value of its elasticity of suly is eual to. A suly curve that intercets the yaxis in the xy lane is classified as elastic. The numerical value of its elasticity of suly is greater than. A suly curve that intercets the xaxis in the xy lane is classified as inelastic. The numerical value of its elasticity of suly is less than. You may have to extend a suly curve to determine if the suly curve intercets an axis. For examle, the inelastic suly curve deicted in Figure 3 does not cross the x axis as drawn yet it would if the curve was extended. Pleases answer the uestions below. You may want to refer to your notebook, lecture notes, textbook, and ast lab assignments. 2. What is the rice elasticity of suly for a commodity if a 4% change in the rice for the commodity is associated with a 2% change in the uantity sulied of the commodity: a) 2 b) 3 c) 4 d) 2

16 6 elastic suly curve (ε s > ) unit elastic suly curve (ε s ) inelastic suly curve (ε s < ) Price Quantity Figure 3: Elasticity and Shae of Suly Curve 2. What would be the ercent change in the uantity sulied of a commodity that is associated with a 2% change in the rice for the commodity if the rice elasticity of suly for the commodity is 2.5: a) 2% b) 2.5% c) 5% d) 8% 22. What would be the ercent change in the rice for a commodity that is associated with a 5% change in the uantity sulied of a commodity if the rice elasticity of suly for the commodity is 5: a) % b) 2% c) 5% d) %

17 7 23. Calculate the average rice elasticity of suly for a commodity in the region enclosed by the oints (, 2) and (3, 4) on the suly curve for the commodity: a) b) 2 c) 3 d) The rice elasticity of suly for the commodity whose suly curve is deicted below could have the following value: a).45 b) c) 2 d) 3 Price Suly Curve Quantity

18 8 Analyzing the Cost of Labor. This exercise will show you how to determine the full cost of labor. As we will demonstrate, the hourly cost of hiring an emloyee is much more than the wage rate that is aid by the emloyer. Let's suose that you own a landscae business in Raleigh. You are thinking about hiring another emloyee. You would like to calculate the full cost of this decision. The costs that you should consider are as follows: 4 wage rate is $9 er hour regular hours worked are,968 overtime hours are overtime ay is.5 times regular ay one week aid vacation one week aid sick leave six aid holidays $ holiday bonus OASDI tax is 6.2% of first $87,4 HI tax is.45% of total ayroll federal unemloyment insurance is.8% state unemloyment insurance is 5.4% of of first $7, of total ayroll first $5,9 of total ayroll workman's comensation insurance is emloyer's retirement contribution is 9% of total ayroll 3.5% of total ayroll health insurance is $6 biweekly life insurance is $25 er month emloyees use ersonal vehicles at work travel allowance for ersonal vehicles is for aroximately 3, miles er year 2 cents er mile uniform allowance is $25 er month educational allowance is $3 er year 4 Please note that some of the costs in this exercise are articular to the business under analysis. For examle, the amount of money that a business ays for workman's comensation insurance deends on the nature of the business. Likewise, some of the costs in this exercise change over time. For examle, the income ceiling on which the OASDI tax is collected will often change from one year to the next.

19 9 Labor Cost Worksheet (The consecutive numbers on the left margin are line numbers referenced within this worksheet. They are NOT uestion numbers. Question numbers for this worksheet begin with #25) (Annual Basis) Payroll:. Regular Pay A) 3,82 B) 6,78 C) 7,72 2.Overtime Pay A),45 B),25 C),35 3.Vacation Pay A) 28 B) 36 C) 72 4.Sick Leave A) 36 B) 24 C) 38 5.Paid Holidays A) 52 B) 432 C) Cash Bonuses A) B) 2 C) 4 7.Other Total Payroll (add lines 7) A) 2,26 B) 2,328 C) 2,34

20 2 Payroll Exenses: 9. Emloyer's Share of OASDI Tax A), B), C), Emloyer's Share of HI Tax A) B) C) Federal Unemloyment Insurance A) 48 B) 56 C) State Unemloyment Insurance A) B) C) Workman's Comensation Insurance A), B), C), Other... 5.Total Payroll Exenses (add lines 9 4) A) 4, B) 4, C) 4,28.68

21 2 Fringe Benefits: 6. Housing and Utilities Allowance... 7.Emloyer's Retirement Contribution A) B) C) Health Insurance A),56 B),28 C),66 9. Life Insurance A) 35 B) 3 C) Meal Allowance Travel Allowance A) 6 B) 63 C) Uniform Allowance A) 3 B) 28 C) Educational Allowance A) 26 B) 3 C) Other Other Other Total Fringe Benefits (add lines 6 26) A) 3, B) 3,77.99 C) 3,87.69

22 22 Labor Cost: 28. Total Labor Cost (add lines 8, 5, and 27) A) 29, B) 26,28.67 C) 28, Hours Worked er Year A) 988 B) 278 C) Total Labor Cost er Hour Worked (divide line 28 by line 29) A) B) C) What is the ercent difference between the wage rate and the total cost of labor er hour worked? That is, I would like for you to be able to say that the total cost of labor is % more than the wage rate in this exercise. A) 52.44%_ B) 3.72 C) How should you decide if it is in the best interest of your business to hire another emloyee? A) Marginal analysis using $3.72 for labor cost B) Marginal analysis using $2.72 for labor cost C) Marginal analysis using $4.68 for labor cost 5. What are some costs of labor that are not included in this exercise? A) Stretching lunch hours and breaks, rest room breaks, B) Monday "blahs", bail out of jail, ersonal roblems, C) "weekenditis" on Friday afternoons. D) All of the above

23 23 5. What rincile is demonstrated in this exercise about the relationshi between the wage rate and the cost of labor? A) the cost of labor is much greater than the wage rate B) the cost of labor is eual to the wage rate C) the cost of labor is less than the wage rate END OF LAB

24 24 THIS IS NOT PART OF THE LAB, BUT FOR YOUR USE! Analyzing the Cost of Labor. This is a coy of the labor cost worksheet that you can use for you own analysis. It is useful to comare emloyment oortunities as well. Different emloyment offers may come with different mixes of salary and benefits. You want to be able to comare the emloyment oortunities on an ales to ales basis. This worksheet can hel do that. Let's suose that you own a landscae business in Raleigh. You are thinking about hiring another emloyee. You would like to calculate the full cost of this decision. The costs that you should consider are as follows: 5 wage rate is $9 er hour regular hours worked are,968 overtime hours are overtime ay is.5 times regular ay one week aid vacation one week aid sick leave six aid holidays $ holiday bonus OASDI tax is 6.2% of first $87, HI tax is.45% of total ayroll federal unemloyment insurance is.8% state unemloyment insurance is 5.4% of of first $7, of total ayroll first $5,9 of total ayroll workman's comensation insurance is emloyer's retirement contribution is 9% of total ayroll 3.5% of total ayroll health insurance is $6 biweekly life insurance is $25 er month emloyees use ersonal vehicles at work travel allowance for ersonal vehicles is for aroximately 3, miles er year 2 cents er mile uniform allowance is $25 er month educational allowance is $3 er year 5 Please note that some of the costs in this exercise are articular to the business under analysis. For examle, the amount of money that a business ays for workman's comensation insurance deends on the nature of the business. Likewise, some of the costs in this exercise change over time. For examle, the income ceiling on which the OASDI tax is collected will often change from one year to the next.

25 25 Labor Cost Worksheet (Annual Basis) Payroll:. Regular Pay Overtime Pay Vacation Pay Sick Leave Paid Holidays Cash Bonuses Other Total Payroll (add lines 7)... Payroll Exenses: 9. Emloyer's Share of OASDI Tax.... Emloyer's Share of HI Tax.... Federal Unemloyment Insurance State Unemloyment Insurance Workman's Comensation Insurance Other Total Payroll Exenses (add lines 9 4)... Fringe Benefits: 6. Housing and Utilities Allowance Emloyer's Retirement Contribution Health Insurance Life Insurance...

26 26 2. Meal Allowance Travel Allowance Uniform Allowance Educational Allowance Other Other Other Total Fringe Benefits (add lines 6 26)... Labor Cost: 28. Total Labor Cost (add lines 8, 5, and 27) Hours Worked er Year Total Labor Cost er Hour Worked (divide line 28 by line 29)... c) How should you decide if it is in the best interest of your business to hire another emloyee? d) What are some costs of labor that are not included in this exercise? e) What rincile is demonstrated in this exercise about the relationshi between the wage rate and the cost of labor?