1. Imagine you are the owner of Toyota Canada. You are trying to determine what price to set for your newest truck you are introducing to the Canadian market. You hired an economist to estimate the demand curve for this truck, and were told it is: q = 11, 250 0.25p a) (5 marks) Suppose you set the price equal to $18,000. What would be the total revenue you would earn from selling this truck? b) (8 marks) What is the elasticity of demand for this truck at this price? According to economic theory, why would this profit maximizing firm be making a mistake by pricing the truck at a price that results in this type of elasticity of demand? Your answer should include a discussion of intensive and extensive margins. c) (7 marks) Suppose the firm wished to maximize its revenue. At what price should it sell its truck? How much revenue will it earn at this price? What is the elasticity of demand at this point?

2. Let's return to our market for this new truck. Suppose the inverse demand and inverse supply curve for trucks were given by the following two equations respectively: P = 45, 000 4Q P = 10, 000 + 3Q a) (8 marks) Determine the free market equilibrium price for this truck in this market, and the amount of trucks that are sold. Calculate the consumer surplus and producer surplus. b) (12 marks) Suppose the government imposed a tax of = $7, 000 on the price of a new truck. Calculate the new equilibrium in this market. This includes finding The new equilibrium quantity sold. The price paid by consumers. The price received by firms. The consumer surplus. The producer surplus. The amount of tax collected by the government. The deadweight loss. c) (5 marks) Discuss what the deadweight loss represents and why it exists. d) (5 marks) In this scenario, who pays a larger share of the tax and why? A full answer will involve a discussion of elasticity.