Question

2. The University of British Columbia (UBC) has established a partnership with a local businessman to set up a lumber mill in the middle of their research forest. UBC is primarily concerned with sustainably managing their forest but recognizes that the 100+ year old trees have significant value in terms of producing quality lumber. The deal is that UBC will provide a fixed quantity of 40 trees per year to the lumber mill who will then process the trees (1 tree 2500 pieces of construction lumber) and sell UBC-branded old-growth lumber to contractors and builders. UBC and the businessman split the profits equally. For the year 2018, graph what the supply curve for the lumber mill. Clearly label all parts of the graph. In what range would you estimate the elasticity of supply? What features of the production process influence the price elasticity of supply for UBC lumber? (2 points) Suppose the price elasticity of demand for UBC lumber is less than one. A strong winter ice storm knocked over a large number of trees in the forest, so the university decides to take those trees and give them to the lumber mill. Using a supply and demand model, graph the market equilibrium for UBC lumber before and after the winter storm. What happens to the lumber mill's total revenue after the storm? Explain in words, by referencing and showing the change in total revenue on your graph. Hint: What is the demand curve telling you? (4 points) Suppose most of the lumber mill's customers are employed by a large oil company. Recent price decreases in oil markets have led to a 30% pay cut for all employees. If the lumber mill also observes the quantity of lumber purchased decline by 40%, what is the income elasticity of demand? Explain how would you characterize the UBC lumber and why (i.e. what does this income elasticity of demand tell you about the product)? (2 points) a. b. c.

Answer 1

Since the deal between the UBC and lumber mill is fixed at 40 tree per year, from which the mill will produce 40 times 2500 = 100000 pieces of lumber, the supply of lumber cannot be increased integral case there is increase integral prices. Elasticity of supply is zero (0) The quantity of dress supplied by the UBC influences the price elasticity of supply. It because despite improving the production techniques, the supply of lumbers cannot be increased. Since the winter storm knocked over large number of trees, the supply of raw material increased. This would be represented by a right ward shift integral supply curve. Now as given integral the question, the demand is inelastic (cd < 1) for lumber. Thus the prices will full more than the proportionate increase in quantity. Hence the total revenue of the firm will reduce or decrease. [ar (P E Q O > cr (P, E, Q, O)]. Demand curve tells that quantity change is more than price change.

Hope this answer solves your purpose. Do give it a thumbs up. All the best.