Intermediate MicroeconomicsECO 340Problem Set 5Due on Thursday October 29th at the beginning of classYou must show how you arrived at every single answer on the problem set. You willreceive ZERO credit for any answer where you don’t show your work.1. (30 pts) Suppose you are an aide to a U.S. Senator who is concerned about theimpact of a recently proposed excise tax on the welfare of her constituents. Youexplained to the Senator that one way of measuring the impact on her constituentsis to determine how the tax change affects the level of total surplus enjoyed by theconstituents. Based on your arguments, you are given the go-ahead to conduct aformal analysis, and obtain the following estimates of demand and supply:
.a. (5 pts) What are the equilibrium quantity and equilibrium price in this market?b. (5 pts) Graph the market equilibrium and identify the consumer surplus, theproducer surplus and the total surplus in this market.c. (5 pts) Compute the price elasticities of demand and supply at the marketequilibrium.d. (5 pts) If a $2 excise tax is levied on the firms that produce this good, what willhappen to the price paid by consumers, the price received by firms, and thequantity traded in the market?e. (5 pts) What is the incidence of this tax on consumers and producers? Explainwhy the incidence of the tax is split this way?f. (5 pts) Graph the market equilibrium and identify the new consumer surplus,the producer surplus, the government revenue, and the dead weight loss. Whatis the change in consumer and producer surplus associated with the tax.2
(20 pts) Suppose that the market for cigarettes is initially in equilibrium and isperfectly competitive. The demand curve can be expressed as P = 60 − Q d ; thesupply curve can be expressed as P = 0.5Q s . Quantity is expressed in millions ofboxes per month.a. (10 pts) What are the equilibrium quantity and equilibrium price in this market?Graph the market equilibrium and identify the consumer surplus, the producersurplus, and the total surplus in this market
b. (10 pts) Now suppose that the federal government imposes a production quotaon cigarettes of 30 million boxes per month. Graph the new market equilibriumand identify the new consumer surplus, producer surplus, total surplus. What isthe deadweight loss (per million boxes), the change in consumer surplus (permillion boxes) and the change in producer surplus (per million boxes)associated with the quota?3. (20 pts) In a perfectly competitive market, the market demand curve is given byQd = 200 − 5Pd, and the market supply curve is given by Qs = 35Ps.a. (4 pts) Find the equilibrium market price and quantity demanded andsupplied in the absence of price controls.b. (4 pts) Graph the market equilibrium and identify the consumer surplus,the producer surplus, and the total surplus in this marketc. (4 pts) Suppose a price ceiling of $2 per unit is imposed. What is thequantity supplied with a price ceiling of this magnitude? What is the sizeof the shortage created by the price ceiling?d. (4 pts) Assume that rationing of the scarce good is as efficient as possible.What is the total surplus in this case? Does the price ceiling result in adeadweight loss? If so, how much is it?e. (4 pts) Find the consumer surplus and producer surplus under the priceceiling, assuming that the rationing of the scarce good is as inefficient aspossible. What is the net economic benefit in this case? Does the priceceiling result in a deadweight loss? If so, how much is it?4. (30 pts) The domestic demand curve for headphones is given by Qd = 5000 −100P. The domestic supply curve for headphones is given by Qs = 150P. Supposeheadphones can be obtained in the world market at a price of $10 per headphone.a. (10 pts) Draw a graph illustrating the free trade equilibrium. Clearly illustrate theequilibrium price, the amount produced domestically, and the amount imported.Estimate and clearly identify in your graph the domestic consumer surplus and thedomestic producer surplus.b. (10 pts) Domestic headphone producers have successfully lobbied Congress toimpose a tariff of $5 per headphone. Draw a graph illustrating the equilibriumwith the tariff. Clearly illustrate the equilibrium price, the amount produceddomestically, and the amount imported. Estimate and clearly identify in yourgraph the domestic consumer surplus, the domestic producer surplus, thegovernment revenue, and the deadweight loss from the tariff.c. (10 pts) Suppose the government imposed a trade prohibition (quota = 0) Drawa graph illustrating the equilibrium with the trade prohibition. Clearly illustratethe equilibrium price, the amount produced domestically, and the amountimported. Estimate and clearly identify in your graph the domestic consumersurplus, the domestic producer surplus, and the deadweight loss from the tradeprohibition.