1-Suppose that a market is described by the following supply and demand equations:

Q5 = 2P

Q = 300 - P

1. Solve for the equilibrium price and the equilibrium quantity.
2. Suppose that a tax of I is placed on buyers, so the new demand equation is

QP = 300 - (P + T)

Solve for the new equilibrium. What happens to the price received by sellers, the price paid by buyers, and the quantity sold?

1. Tax revenue is I X 2. Use your answer to part (b) to solve for tax revenue as a function of T Graph this relationship for T between 0 and 300.
2. The deadweight loss of a tax is the area of the triangle between the supply and demand curves.

Recalling that the area of a triangle is X base height, solve for deadweight loss as a function of T. Graph this relationship for T between 0 and

300. Hint: Looking sideways, the base of the deadweight loss triangle is I, and the height is the difference between the quantity sold with the tax and the quantity sold without the tax.)

e. The government now levies a tax on this good of $200 per unit. Is this a good policy? Why or why not? Can you propose a better policy?

2-China is a major producer of grains, such as wheat, corn, and rice. In 2008, the Chinese government, concerned that grain exports were driving up food prices for domestic consumers, imposed a tax on grain exports.

1. Draw the graph that describes the market for grain in an exporting country. Use this graph as the starting point to answer the following questions.
2. How does an export tax affect domestic grain prices.
3. How does it affect the welfare of domestic consumers, the welfare of domestic producers, and government revenue?
4. What happens to total welfare in China, as measured by the sum of consumer surplus, producer surplus, and tax revenue?

3. Wireless, high-speed Internet is provided for free in the airport of the city of Communityville.

1. At first, only a few people use the service. What type of a good is this and why?
2. Eventually, as more people find out about the service and start using it, the speed of the connection begins to fall. Now what type of a good is the wireless Internet service?
3. What problem might result and why? What is one possible way to correct this problem?