Part 1.

1). The market demand function for a good is given by Q = D(p) = 800 ? 50p. For each firm that produces the good the total cost function is TC(Q) = 4Q+( Q2/2) . Recall that this means that the marginal cost is MC(Q) = 4 + Q. Assume that firms are price takers.

(a) What is the efficient scale of production and the minimum of average cost for each firm?

Hint: Graph the average cost curve first.

(b) What is the supply function of each firm?

(c) If there are currently 100 firms producing the good, what is the market supply function? What is the short-run competitive equilibrium in this market with 100 firms? What is the profit of each firm?

(d) What is the long-run competitive equilibrium price and quantity in this market?

2). Consider the market of the previous question in the short run (with 100 firms), and assume that the government imposes a tax of $3 per unit.

(a) What would be the new equilibrium quantity supplied after the tax is imposed?

(b) What would be the price consumers pay and the price sellers receive with the tax? Explain how the burden of the tax is shared between consumers and producers.

(c) Compute consumer and producer surplus before and after the tax. How much government revenue is generated by the tax? How large is the deadweight loss?

(d) What would be the long-run equilibrium quantity in this market with the tax? What are the prices that consumers pay and sellers receive? Compare this to the long-run equilibrium without the tax and determine how much of the burden of the tax is borne by consumers and producers.

Task06.

1.On the market for widgets, the maximum price anyone is willing to pay is $100 (quantity demanded is zero at a higher price). The equilibrium price is $80 and the equilibrium quantity is 442. Calculate consumer surplus on the market.

2. Hester owns an ice cream shop. It costs her $1 per cone to make 48 ice cream cones. If she sells 48 cones for $5 each, her producer surplus is equal to

3. On a competitive market, consumers demand 116 units and producers supply 10 units at a price of 5. When price increases to 10, consumers demand 84 units and producers supply 35 units. By how much did the market shortage decreased because of this price increase?

4. The consumer surplus at the equilibrium price of $10 and equilibrium quantity of 100 units is 3000. The government imposes a price floor at $39, which reduces quantity traded to 60. What is the resulting consumer surplus?

5. A per-unit tax is introduced on a market. The tax increases the price paid by consumers by $19, decreases the price received by producers by $21, and decreases the quantity traded on the market from 850 to 500 units. What is the tax revenue?

6. After an excise tax of $30 is introduced on a market, consumer surplus drops from 6500 to 4500 while producer surplus drops from 5000 to 4000. The equilibrium price before the tax was introduced was $95. What is the price paid by consumers after the tax?

7. A perfectly competitive firm realizes a total revenue of $2500 and a profit of $500. The firm sold its product at a price of $17 per unit. What was the average total cost

8. The price of coffee rose 22 percent and the quantity of coffee demanded fell by 79 percent. What is the price elasticity of demand for coffee? Report your answer in its absolute value, rounded to 2 decimal places.

9. A monopolist with constant marginal cost of $20 produces 100 units of product that is sells for a price of $44. If this monopolist was a perfectly competitive firm, it would produce 150 units of product. What is the revenue of this firm if it was perfectly competitive?

10. The marginal cost is constant and equal to 20. There are no fixed costs of production. What is the average variable cost of producing 68 units?

Part c.

Part II. Answer all of the following questions: 15. This question is concerned with issues related to "tax incidence" (the study of the final burden of a tax after considering all market reactions to it). The figure below depicts the situation in a perfectly competitive market before and after the imposition of an excise tax. An excise tax is a tax on each unit of a good consumed. Initially, the long-run equilibrium price and quantity of the good in question are P, and Q1, respectively. Suppose now that the government levies an excise tax of ST per unit of output. Price N LS P 1 H Quantity When the long-run supply curve (LS) of a good has a positive slope, both consumers and firms pay a portion of the tax. The imposition of the tax shifts the market demand curve inward to D' which causes the price to fall from Pl to P2 (as some firms exit and input prices fall). The (net) price that producers receive will be equal to The price that consumers pay for the good will be equal to Tax revenue to the government will be given by area The total loss of consumer surplus is the area The total loss in producer surplus is the area The deadweight loss of the tax will be given by area (The deadweight loss is the losses of consumer and producer surplus that are not transferred to other parties.) If demand is relatively inelastic and supply is clastic, who (consumers or producers) will pay more of the tax? h) If supply is relatively inelastic and demand is clastic, who will pay more of the tax?4. Assume that a firm's short run cost function is C(q) =100q-4q' +0.2q' +450. What is the firm's short run supply curve?? If price is p=115, how much output does the firm supply? 5. Each firm in a competitive market has a cost function of C(q) = q-q' + q . There are an unlimited number of potential firms in this market. The market demand function is given by Q=24- p . Determine the long run equilibrium price, quantity per firm, market quantity and number of firms. How do these values change is a tax of $1 per unit is collected from each firm? 6. Assume that the inverse demand function for cheese is Q=100-10p and the supply curve is Q=10p. a. [Easy] What are the effects of a specific tax of $1 per unit on the equilibrium quantity and price, government tax revenue, consumer surplus, producer surplus, welfare and DWL? b. [Harder] What are the effects of a specific subsidy (negative specific tax) of $1 per unit on the equilibrium quantity and price, government tax revenue, consumer surplus, producer surplus, welfare and DWL? c. [Hard] The government, instead of a tax or subsidy, imposes a price support (minimum price) of $6. The way this is implemented is via a deficiency payment. This means the government will guarantee producers a price of $6 and the producers choose their output accordingly. They then sell that output to consumers at whatever price consumers are willing to pay for that total output (not $6!!!). The government pays producers the difference between the $6 dollars and the price consumers are willing to pay for all units produced. This payment is called the deficiency payment. What is the quantity supplied, the price that clears the market and the deficiency payment? What effect does this program have on consumer surplus, producer surplus, welfare and deadweight loss? d. [Medium hard] Now instead of any of the policies above, the government imposes a price ceiling of $3. That is it. Price is not allowed to rise above $3. How does equilibrium change (price and quantity)? What effect does this price ceiling have on consumer surplus, producer surplus and deadweight loss