• •  QUESTIONS: (1) This question is about the market for peanut butter and asks about the per-unit tax .

    (a) Sketch a graph of the market for peanut butter, labeling the supply and demand curves, both axes, and the equilibrium price and equilibrium quantity. Assume that the equilibrium price is $5.00 and the equilibrium quantity is 10 (measured in millions of 40 ounce jars).

    (b) Now, a per-unit tax of $2.00 is imposed on sellers in this market. SHOW and describe what happens in this market. Draw and label any curve shifting and any change in the equilibrium price or equilibrium quantity. What is the new price that buyers pay for peanut butter? What is the price that sellers get to keep (after they pay the per-unit tax to the government)? Show both of these prices on the graph. Note that you don’t need to show an exact dollar value for these prices; instead, you can just show on the vertical axis where these prices would fall (for example, $P with tax; and $P kept by sellers).

    (c) How does the elasticity of demand affect your response in (b) above? In other words, how does it matter if you drew your demand curves super steep versus if you had drawn your demand curve relatively flat?

    (2) This question is about the market for computers and asks about consumer and producer surplus.

    (a) Sketch the supply and demand model for computers. Label fully.

    (b) Show clearly on your graph the area that represents consumer surplus. Describe this area in words. In other words, how did you know where to put this consumer surplus on the graph?

    (c) Show clearly on your graph the area that represents producer surplus. Describe this area in words. In other words, how did you know where to put this producer surplus on the graph?

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    QUSTION INSTRUCTIONS: These graphs must be drawn by hand or through an application(make sure you draw the graph). You can try any number of free apps for the iphone or android; for the iphone, one example is Adobe Scan. Be sure to experiment with the app before the assignment deadline to ensure there’s time to deal with any glitches. Whatever method you use to upload these drawings, you are responsible for viewing the document AFTER uploading into the E-Learning Dropbox to confirm that it is sufficiently clear for me to grade.

    INSTRUCTIONS FOR DRAWING GRAPHS: Follow these directions for Problem Set questions that ask you to draw a graph that is for any supply and demand model. Follow these directions as closely as possible if the question is just asking for one part of this model (say, just a demand curve or just a supply curve).

    (1) Draw the vertical axis and label it $ Price.

    (2) Draw the horizontal axis and label it Quantity.

    (3) Draw and label the Demand curve (label with D)

    (4) Draw and label the Supply curve (label with S)

    (5) Label the equilibrium price on the vertical axis with P1

    (6) Label the equilibrium quantity on the horizontal axis with Q1.

    (7) If the question involves a shift in a curve, always label the new curve, show clearly how the curve shifted, and always label the new equilibrium price and quantity directly on the appropriate axes.