QUESTION 1. Consider a market which is initially in equilibrium. Suppose the government decides to impose a price ceiling, which would force firms to sell their product at a price below the equilibrium price.

A) What will be the effect of this price ceiling on the total quantity sold?

B) How are the producer surplus and the consumer surplus affected?

C) Does the price ceiling affect all consumers the same way? Explain.

D) Is the new situation efficient? Explain.

QUESTION 2. The Montreal South-Shore Transit Authority estimates the demand for its service as follows:

Qd = 5 450 - 2 000 P - 0.1 Y + 100 Pa

where: Qd is the number of bus tickets demanded daily;

P is the price of a bus ticket;

Y is the average income of the population;

Pa is the cost of using alternative modes of transportation (automobile, mainly).

A) How should one interpret the sign (+ or -) in front of each coefficient in the demand equation? Be as explicit as possible.

B) Calculate the demand function using the values Y = $300 and Pa = $5.80 and draw the demand curve. Make sure to clearly identify the intersections with the axes.

C) What should be the price of a bus ticket, given that the company can only accommodate 4000 passenger trips daily, and that it aims for 100% occupancy rate? Show your calculations clearly.

(Note: The Transit Authority provides a public service and does not aim to maximize profits. The pricing of bus tickets mainly helps regulate the flow of passengers.)

D) What will be the size of the shortage in passenger trips due to an increase of $2 in the cost of alternative modes of transportation?

E) How should the company adjust its pricing so that the quantity demanded equals its capacity? Provide a numerical answer.

QUESTION 3. Two economic agents, A and B, value successive units of a good (from the 1st unit to the 10th unit) as follows: Initially, A owns 8 units and B owns 2 units.