Question
Suppose River City's demand curve for tattoos is Qd = 2500 - 20P and the supply curve is Qs = 100P - 3500, where the
Suppose River City's demand curve for tattoos is Qd = 2500 - 20P and the supply curve is Qs = 100P - 3500, where the quantities demanded and supplied are both measured in the number of tattoos per year.
(a) Compute the equilibrium price and quantity of tattoos in River City.
(b) Draw a fully labeled supply and demand graph illustrating this equilibrium price and quantity. [Make sure your intercepts are specified on your graph.]
(c) Now suppose River City's mayor believes tattoo shops are a blight on society and rules that no more than 500 tattoos can be purchased per year in the city. He enforces this quota by requiring that tattooparlors provide sales data to the city. [It can be assumed that no consumers travel outside of River City to receivetattoos.] Using a demand and supply diagram (with clearly specified labeling of axes) to illustrate your answer, compute both the consumer surplus and producer surplus in both the unregulated and regulated markets for tattoos in River City.
(d) Compute the deadweight loss generated as a result of moving to a regulated market. Explain carefully in words what this deadweight loss represents.
(e) Suppose River City's mayor decides to impose a price floor instead of a quota. What difference, if any, would this make to welfare in the market for tattoos in River City? Explain carefully in words (you do not need to do any computations.)
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