Question 1:

Suppose you are given the following information:

Qs = 100 + 3P Qd = 400 - 2P

where Qs

is the quantity supplied, Qd

is the quantity demanded and P is price.

a. From this information compute equilibrium price and quantity. [6 marks]

b. Now suppose that a tax is placed on buyers so that Qd = 400 - (2P + T) where T is taxes. If T = 15,

solve for the new equilibrium price and quantity. (Note: You are solving for the equilibrium price

for sellers and buyers). [ 9 marks]

c. How does a tax on a good affect the price paid by buyers, price receive by sellers, and the quantity

sold? [5 marks]

d. Suppose the government imposes a $10 tax per pack of cigarettes, and the supply for cigarettes

are more elastic than demand. What will be the effect of this tax on both the buyer and seller?

[5 marks]

Question 2

a. Define the price elasticity of demand and state the formula for the price of elasticity of demand.

[5 marks]

b. Explain why the concept price elasticity should be of interest to those in business who have

choices to make about the price at which to sell their products. [10 marks]

c. As the price of good X rises from $10 to $12, the quantity demanded of good Y rises from 100

units to 114 units.

i. What is the cross elasticity of demand? [5 marks]

ii. Are X and Y substitutes or complements? Explain your answer [5 marks]

Question 3

a. List and define two types of price controls that government can use to regulate prices. [5 marks]

b. "When government laws regulate prices instead of letting market forces determine prices, it

undermines the rationing function of competitive prices." Discuss briefly the impact of this

statement in terms of the two types of price controls chosen in 3(a). [10 marks]

Graded Discussion Rubric

Question Distribution of Marks Total