Q#1Assume the demand curve for beer is given by P=11.7-2Q; the supply curve is given by P=Q.
(a) Find the equilibrium quantity and the corresponding market clearing price.
(b) Now assume the supply of beer will be subsidized with $0.30 per beer. What is the quantity consumed/supplied? What are the prices? Calculate the total subsidy paid. How much will be gained by the suppliers of beer? What is the overall change in welfare? Is this a gain or a loss?
Q#2: Karl and John exhibit different consumption pattern when they fill their cars at the (gasoline) filling station. Karl always buys 5 gallons, regardless of the price of gasoline. John always spends $20 on gasoline, regardless of its price.
Calculate the price elasticity of Karl and John and show your work!
Q#3: About 100 million pounds of dates are consumed in the United States each year, and the price has been about 50 cents per pound. However, date producers feel that their incomes are too low and have convinced the government that price supports are in order. The government will therefore buy up as many dates as necessary to keep the price at $1 per pound. However, government
economists are worried about the impact of this program because they have no estimates of the elasticities of date demand or supply.a. Could this program cost the government more than $50 million per year?
Under what conditions? Could it cost less than $50 million per year? Under what conditions? Illustrate with a diagram.
b. Could this program cost consumers (in terms of lost consumer surplus)
more than $50 million per year? Under what conditions? Could it cost consumers less than $50 million per year? Under what conditions? Again, use a diagram to illustrate.