Question
Problem 1: Based on Baye and Prince, Chapter 2, Conceptual Problem 7 Suppose demand and supply are given by Qd =14 (0.5)*P and Qs =
Problem 1: Based on Baye and Prince, Chapter 2, Conceptual Problem 7 Suppose demand and supply are given by Qd =14 (0.5)*P and Qs = (0.25)*P 1 a. Determine the equilibrium price and quantity. b. What are the inverse demand and supply functions? c. Show the equilibrium graphically. d. Suppose a 12 per unit excise tax is imposed on the good (payable by the supplier). Determine the new equilibrium price and quantity. Show how this changes graphically. e. How much tax revenue is collected from the new $12 per unit tax? Problem 2: Based on Baye and Prince, Chapter 3, Conceptual Problem 2 The demand curve for a product is given by Qdx=1200 - 3Px 0.1Pz, where Pz=300. a. What is the own price elasticity of demand when Px=140? Is demand elastic or inelastic at this price? What would happen to the firm's revenue if it decided to charge a price below 140? b. What is the own price elasticity of demand when Px=240? Is demand elastic or inelastic at this price? What would happen to the firm's revenue if it decided to charge a price below 240? c. What is the cross-price elasticity of demand between good X and good Z when Px= 140? Are goods X and Z complements or substitutes? Problem 3: Based on Baye and Prince, Chapter 3, Conceptual Problem 4 Suppose the own price elasticity of demand for good X is -3, its income elasticity is 1, its advertising elasticity is 2, and the cross-price elasticity between it and good Y is -4. Determine how much the consumption of this good will change when. a. The price of good X decreases by 5% b. The price of good Y increases by 8% c. Advertising decreases by 4% d. Income increases by 4%
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