Question
Suppose the market for coffee in China is characterized by demand Qd = 100010P. Individual coffee shops are identical with total costs T C =
Suppose the market for coffee in China is characterized by demand Qd = 100010P. Individual coffee shops are identical with total costs T C = 5q^2 and marginal costs MC = 10q.
a) What is the individual short-run supply curve equation for a coffee shop? Show the calculations. (4 marks)
b) Suppose the market for coffee is in a long-run equilibrium. What is the market price, firm output, number of firms, and market output? Show the calculations. (4 marks)
c) What is the market supply equation? Is supply elastic, inelastic, or unit-elastic? Use graphs to illustrate your answer? (4 marks) .
d) What is consumer surplus, producer surplus, and total surplus? Use graphs to illustrate Show your workings. (4 marks)
e) Suppose the government has introduced a tax on coffee of $5 per cup. Now what are the equilibrium prices (price paid by buyers and price kept by sellers), quantity, and deadweight loss? Show your workings. (3 marks)
(f) What effect will this policy have in the long-run? Explain. (3 marks)
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