Microeconomics Assignment

Answers to all questions and problems are found on each of the following.

1)Problems based on Quantitative Market Shifts Practices. You are given the following information: Supply: P = 32.5 + 1.25 QSDemand: P = 120 - 0.5 QD

a)What is the consumer surplus and producer surplus generated in the market at equilibrium?

b)Regulations require a technology change which causes the price to increase by 8.75 for each quantity level. What is the new supply equation?

c)Find the new equilibrium price and new equilibrium quantity.

2) One of the largest changes in the economy over the past several decades is that technological advances have reduced the cost of making computers.

a)Draw a supply-and-demand diagram to show what happened to price, quantity, consumer surplus, and producer surplus in the market for computers.

3)After economics class one day, your friend suggests that taxing food would be a good way to raise revenue because the demand for food is quite inelastic. In what sense is taxing food a "good" way to raise revenue? In what sense is it not a "good" way to raise revenue?

4)Hotel rooms in Smalltown go for $100, and 1,000 rooms are rented on a typical day.

a) To raise revenue, the mayor decides to charge hotels a tax of $10 per rented room. After the tax is imposed, the going rate for hotel rooms rises to $108, and the number of rooms rented falls to 900. Calculate the amount of revenue this tax raises for Smalltown and the deadweight loss of the tax. (Hint: The area of a triangle is base height.)

b)The mayor now doubles the tax to $20. The price rises to $116, and the number of rooms rented falls to 800. Calculate tax revenue and deadweight loss with this larger tax. Are they double, more than double, or less than double? Explain.

5)Assume a market is described by the following equations. P= 612 - 7QDQS = 1.5P - 90 Moreover, you are told (and can verify by plugging in one value to both equations to get the second value) that market equilibrium occurs at an equilibrium price of 108 and equilibrium quantity of 72.

a)Sketch this market. Include the vertical intercepts for the supply and demand curves, labels for each curve and axis, and equilibrium on your graph.

b)The textbook states "A tax burden falls more heavily on the side of the market that is less elastic."On page 125.Calculate the point price elasticity of supply and point price elasticity of demand at equilibrium in this market.Based on your calculations of elasticities, which side of the market will have the largest burden from a tax? Hint: Remember point price elasticity of supply formula is s = ms P / Q where ms = 1.5 is the slope from the supply equation Q = msP + b given above, and the price and quantity are given in the problem. The point price elasticity demand formula is = | md P / Q | where md is the slope from the demand equation in the form Q = mdP +b, so once the inverse demand curve is rearranged the appropriate md for the point price elasticity formula is -1/7.

c)Verify your prediction and the textbook statement by calculating the consumer tax incidence and producer tax incidence from a $46 tax in this market levied on producers. With the tax, the new equilibrium quantity is 66, the buyers' price is 150, and the sellers' price is 104.

6)Problems based on Excise Tax Practice Problem 3 Demand for cupcakes in Cake land is described by the equation P = 90 -3QD and supply are described by the equation P = 10 + QS.

a)Solve for the equilibrium price and equilibrium quantity.

b)Solve for consumer surplus, producer surplus, and total surplus in equilibrium. For parts, c, d, and e of this problem assume the Cake land government imposes a $4 tax on each cupcake.

c)Find the new supply curve assuming the tax is levied on producers and solve for the equilibrium price and equilibrium quantity with the tax imposed.

d)Solve for consumer surplus and producer surplus in the market at equilibrium with the tax.

e)Solve for tax revenue (TR) and deadweight loss (DWL) from this tax.