Problem 4. Suppose that US demand for lumber (wood used in construction) is given by Qd 10P +2l and that US supply of lumber is given by Q=10+3P where quantities are in million metric tons (MMT), price is in dollars per 100 pounds, and I is US median family income in thousands of dollars. Assume that US median family income is $60,000. 1. Find the equilibrium quantity and price of lumber in a competitive US market. 2. At the equilibrium you identified in part (a), compute the own-price elasticity of demand for lumber and the income elasticity of demand for lumber. Interpret each elasticity. Problem 5. Refer to problem 4 for supply and demand functions. 1. Suppose that US opens to trade and finds that the world price of lumber is $20,000. Will it import or export lumber? Why? 2. Find quantity of lumber consumed, produced domestically, and imports/exports. Show on a graph. 3. What would be the effect on social surplus if US government imposed a $5,000 tariff on trade (per unit of good traded), bringing the price up to $25,000 ? Show on a graph. Problem 6. Calculate the government's revenue from the tariff imposed in problem 5 part c. Problem 7. Refer to problem 4 for supply and demand functions. Suppose the lumber production is hurting the environment. 1. What sort of externality is this? (positiveegative, supply/demand) 2. Show on a graph the effect of this externality on the market and social surplus. 3. What can the society do to counteract this externality? Show on a graph. BONUS QUESTION ( 20 points) Refer to problem 4 for supply and demand functions. Suppose the government introduces a subsidy on producers of $1,000 per 100 pounds, in order to encourage lumber production. Find the quantity that will be produced and consumed after the introduction of the subsidy. Find the price that consumers will pay and the price that producers will receive. Show all on the graph