ECON 1001A - Homework In this homework you solve for the equilibrium price and quantity of donuts and then look at the impact of a price ceiling, a price floor, and a tax on buyers. Suppose supply and demand for donuts are given by: ad = A -2P Q5 = 6P A and 6. - Letxbe 7and ybe8. - Now set your values for A and 6 as: X V A = 5 + 6 = + 0 1 2 2 your values ofA and 8 are: 7 8 A=5+e=g5 3=e+0.1=4.1 2 2 Questions 1. Competitive Equilibrium. In this question you solve for the competitive equilibrium in the market for donuts. (a) Solve for the equilibrium price and quantity of donuts. Note: some combinations ofA and 8 will imply quite cheap or quite expensive donuts so don't worry if your answer seems unrealistic. Also, it is very likely that your equilibrium quantity will include a fraction again don't worry. (b) Rewrite the demand curve as the inverse demand curve, that is P = and plot this along with the supply curve. Indicate the equilibrium price and quantity, as well as the areas which represent consumer and producer surplus. (c) Calculate the amount of producer and consumer surplus in this equilibrium. 2. Price Floor. Suppose that the government imposes a price floor equal to PF = 1.60. (a) Draw a diagram showing your market for donuts and indicate the price floor on this diagram. Is this price floor binding in your market for donuts? Carefully explain how you came to your answer. (b) lfthis price floor is binding, how many donuts will be sold in this market following its imposition, and at what price? (c) If this is a binding price floor, does it lead to a shortage or a surplus of donuts? If so, calculate the amount of this shortage or surplus. 3. Price Ceiling. Suppose that the government imposes a price ceiling equal to PC = 1.60. (a) Draw a diagram showing your market for donuts and indicate the price ceiling on this diagram. Is this price ceiling binding in your market for donuts? Carefully explain how you came to your answer. (b) If this price ceiling is binding, how many donuts will be sold in this market following its imposition, and at what price? (c) If this is a binding price ceiling, does it lead to a shortage or a surplus of donuts? If so, calculate the amount of this shortage or surplus. 4. Tax. Suppose that the government imposes a tax equal to T = 0.50 which must be paid by buyers for every donut they purchase. (a) How does this tax change the supply and/or demand curve for donuts? (b) Solve for the new equilibrium price and quantity of donuts. Give the price paid by the buyer and the price received by the seller. (c) Draw a single supply and demand diagram that compares the equilibrium with and without the tax. Be sure to indicate the equilibrium quantity of donuts sold as well as the price paid by buyers and the price received by sellers in each case. On the same diagram, indicate the areas which represent consumer and producer surplus, tax revenue and the deadweight loss arising from this tax. (cl) Calculate the amount of producer and consumer surplus at this new equilibrium price and quantity, as well as the amount of tax revenue and the deadweight loss. (e) ls total surplus higher than, lower than or the same as in question one? Give an economic explanation for why total surplus has or has not changed. (f) Comparing your answer to that in question one, would you say that the burden of this tax has fallen more on the buyers or on the sellers of donuts? Explain your