Assignment 2

1. A good can be produced in a competitive industry at a cost of $10 per unit. There are 100 consumers are each willing to pay $12 each to consume a single unit of the good (additional units have no value to them.) What is the equilibrium price and quantity sold? The government imposes a tax of $1 on the good. What is the deadweight loss of this tax?
2. Suppose that the demand curve is given byD(p) = 10p. What is the gross benefit from consuming 6 units of the good?
3. In the above example, if the price changes from 4 to 6, what is the change in consumer's surplus?
4. If the market demand curve isD(p) = 100.5p, what is the inverse demand curve?
5. An addict's demand function for a drug may be very inelastic, but the market demand function might be quite elastic. How can this be?
6. If D(p) = 122p, what price will maximize revenue?
7. Suppose that the demand curve for a good is given byD(p) = 100/p.What price will maximize revenue?
8. What is the effect of a subsidy in a market with a horizontal supply curve? With a vertical supply curve?
9. Suppose that the demand curve is vertical while the supply curve slopes upward. If a tax is imposed in this market who ends up paying it?
10. Suppose that all consumers view red pencils and blue pencils as perfect substitutes. Suppose that the supply curve for red pencils is upward slop- ing. Let the price of red pencils and blue pencils beprandpb. What would happen if the government put a tax only on red pencils?