Question 1: The demand function of the peanut butter market is given as QD=40-2P, and the market equilibrium price is $10. (25%) I. If the price increased to $11, compute the (point) elasticity at $10 II. Compute the arc elasticity between $10 and $11. III. If the price increased to $15, compute the (point) elasticity at $10, and the arc elasticity between $10 and $15. Is the point elasticity different from your previous answer? IV. The average income of the neighborhood increased from $50,000 to $60,000. We observe the peanut butter sales dropped from 20 to 16 units. Compute the income elasticity of peanut butter. (When not specied, you should compute the point elasticity) V. What type of good is peanut butter given its income elasticity? Question 2: In a perfectly competitive market, the demand curve is given as: Q=100-5P, the supply curve is given as Q=3P-12. (30%) I. II. III. IV. Compute the total social surplus of this market. If the government impose a tax on the producers, and the tax rate is $2 per unit produced. Graphically show the tax revenue and the deadweight loss (DWL). Compute the new producer surplus and the DWL. Instead of taxing the producers, if the government impose the same tax ($2 per unit) on the consumers, graphically show the change in the market equilibrium and the DWL. Does it really matter whether the tax is imposed on consumers or the producers? Question 3: [n a perfectly competitive market, the demand curve is given as: Q=100-4P, the supply curve is given as Q=2P-8. (20%) I. Compute the total social surplus. II. If the producers are now receiving a $4 per unit subsidy, graphically show the DWL of this market. III. Report the new social surplus with this subsidy. Question 4: [n a market with demand: Q=200-2P, supply Q=P-40, if for every unit consumed, the society gets a benet equivalent to $15 (MEB=$15) (25%) I. What is the SS when this is a free market? II. What is the DWL of the market due to the externality? III. Suppose the government uses a Pigouvian subsidy to correct this market failure, compute the CS, PS, S(subsidy), EB(external benet) of the market under this tax