Part A -
1. The government of a state sets a price floor of $5 on each product sold in a market. The previous equilibrium price for the product was $4.5. How would this policy affect the market outcome? Explain with the help of a graph.
2. Consider the following demand curve for a consumer good Q = 100 - 0.1P. The equilibrium price is $20. Determine the consumer surplus.
3. The equilibrium in a competitive market is described by the price P* and quantity Q*. Describe what happens to consumer and producer surplus, in the case where the demand curve becomes more elastic, but the same price-quantity equilibrium is maintained. Draw a graph.
4. The cross-price elasticity of demand for X with respect to the price of Y is 0.4. If we expect the price of Y to decline by 15%, what is the expected change in the quantity demanded for X? Show your computations.
5. A $5 tax is imposed on the sale of a particular industrial product. If the demand for that product is QD=60-2P and supply for that product is QS=5+3P. Calculate the equilibrium price(s) and quantity after the tax.
6. Consider a good whose own price elasticity of demand is -1.5 and price elasticity of supply is 0.5. How much is the fraction of a specific tax that is borne by the consumers?
7. Are the deadweight losses due to tariffs or import quotas generally greater when supply and demand are more elastic or inelastic? Explain.
8. Draw a graph that shows an effective import quota. Identify equilibrium price and quantity, consumer surplus, producer surplus and deadweight loss.
9. The government is considering canceling price supports for all agricultural producers. This policy will hurt the farmers whose products have a (low / high) _________ own price elasticity of demand and a (low / high) _________ price elasticity of market supply. Explain your choice.
10. Suppose the government imposes a price floor. What effect will it have on producer surplus? Show it in a graph.
Part B -
Answer the following problems in the space provided. Please show your work in an organized way with clearly labeled graphs should if you choose to use any. Questions are ten points each
11. A company is interested in examining elasticity of a new product. Economists at that company estimate that short run and long run demands are QD= 20-2P and QD= 16-1P respectively.
At a price of P= 4
a) What is the price elasticity of demand in the short run?
b) What is the price elasticity of demand in the long run?
c) Given your answers in a and b, is the product a durable or non-durable good? Why?
12. A pharma company produces 100 drugs a day. Each one is sold for $600. Suppose the own price elasticity of demand for this drug is -0.8 (elasticity of demand is negative) and the price elasticity of supply is 1.5.
a. Compute the slope and intercept coefficients for the linear supply and demand equations.
b. If the local government imposed a per unit tax of $25.00 per drug manufactured, what would be the new equilibrium price of drugs?
c. Would the introduction of the tax change the revenue to the firm?
13. Phil's utility function is U = X2/3Y1/3, where MUX = 2Y1/3/3X1/3 and MUY = X2/3/3Y2/3.
In Los Angeles, Phil's net income would equal $4500, and the prices of good X and good Y are $5 and $5, respectively. In Washington, D.C., Phil's net income would equal $8400, and the prices of good X and good Y are $8 and $10, respectively. Where should Phil live if his goal is to maximize his utility?