1. Suppose the market demand function is given by D (PD) 60 0 PD and the supply is S (P) = 2Ps.

a) Find the market equilibrium without taxes where PD=PS.

b) Suppose now the supplier is required to a per unit tax of t = 3. Draw a graph to to show the change in the supply curve. Find the equilibrium quantity and prices, q* , PS ,and PD. How much of the per unit tax is passed on to the consumer?

c)Suppose now that the demander is required to a per unit tax of t=3. Draw a graph to show the change in the demand curve Find the equilibrium quantity and prices, q* , Ps, and %. Compare your answers in parts b) and c).

d)Calculate the change in consumer's surplus, change in producer's surplus, and dead weight loss as a result of the policy change. Illustrate them on a graph.

2.Consider a firm that employs capital k and labour in production. The production function is f (k,l) = 2k 1/³ l¹ /² . The price of output is p = 1.

a)Does the technology exhibit constant, decreasing, or increasing returns to scale?

b)Find the marginal product of each factor and the marginal technical rate of substitution. Determine if the technology has diminishing marginal product in either factor.

c) Suppose in the short run, capital is fixed at k=27. What extra information would you need to determine the exact amount of labour to be employed in order to maximize short-run profits. Provide a suitable number yourself. and find how much labour is employed. Illustrate your answer with a graph.