1.In a presidential campaign, a candidate proposes a 50 cent per gallon tax on gasoline. The idea of a gasoline tax is both to raise government revenue and to reduce oil consumption and the country's dependence on oil imports. The Demand and supply functions are given by Q_d= 150 - 50P and Q_s= 60 + 40p respectively. If the candidate is voted into power and the policy is adopted:

a)Calculate the equilibrium quantity and price before tax.(1 mark)

b)What will be the equilibrium quantity and price after the tax (2 marks)

c)Calculate the loss in Consumer surplus and producer surplus ( 2 marks)

d)Calculate the Deadweight Loss(1 mark)

e)Graphically present the equilibrium price and quantity before and after the tax, and show on the graph the dead weight loss. (2 marks)

f)Refer to the graph above to explain the effect of the tax on social welfare (as measured by the net change in consumer surplus and producer surplus) ( 1 mark)

g)How much tax revenue does the government collect (1 mark)

h)How much of the tax does the consumer and the producer bear? Why does the other bear more of tax? (2 marks)

2.Do each of the following production functions exhibit decreasing, increasing or constant returns to scale?

i.Q=0.5KL

ii.Q= 2K + 3L

iii.Q= K^0.4L^0.5

b)Suppose a chair manufacturer is producing in the short run when equipment is fixed. The manufacturer knows that as the number of labourers used in the production process increases from 1 to 7, the number of chairs produced changes as follows: 10, 17, 22, 25, 26, 25, 23.

i.Calculate the marginal and average product of labour for this production function

ii.Does this production function exhibit diminishing returns to Labour? Explain

iii.Explain intuitively what might cause the marginal product of Labour to become negative

3. A firm has demand functions given by Q= 24 - 0.2Pand the Total cost is given by TC= 35 + 40Q .

i.What price will the firm charge for the good?

ii.Calculate the maximum profit