ECON 500 – Spring 2007 Chapter 7 – “Efficiency and Exchange” Questions from the textbook: Review questions 1, 2, 4, and 5 (page 213). Problems 1, 2, 4, 5, and 9 (pages 213-215). Additional problems: 1) Consider a market in which 1025)(qqPD−= and 5)(=qPS. a. In the absence of government intervention, determine: the equilibrium price and quantity in this market, the resulting levels of Producers’ Surplus and Consumers’ Surplus, and the resulting level of Total Economic Surplus. b. Suppose the government imposes a tax of $T per unit on the seller’s of this good (with 200≤≤T). In the presence of this tax, determine: the total number of units purchased by consumers, the price paid by consumers for each unit purchased, total Consumers’ Surplus, total revenue generated by the tax, and the Deadweight-Loss associated with the tax. Illustrate this situation graphically. c. Argue that: c.i. total Consumers’ Surplus decreases as 200 ≤≤ T is increased. c.ii. Deadweight-Loss increases as 200≤≤T is increased. c.iii. as T is increased from 0=T to 20=T , the revenue generated by the tax initially increases but then decreases, and further, the revenue generated by the tax is maximized by setting 10=T (hint: from the graphical illustration of this situation, compare “the behavior of tax revenue as 200≤≤T is increased” to “the behavior of total consumer expenditures along a linear demand curve as price is increased”).2) Consider a market with Supply and Demand as illustrated below: a. In the absence of any government intervention: how much trade will take place and at what price will trade take place? b. If the government were to impose a per unit tax of $4.80 on buyers. In the presence of this tax: how much trade will take place, what price will buyers ultimately pay for the good, what price will sellers ultimately receive for the good, and how much tax revenue is generated? Explain. c. Redo part (b), instead supposing that a per unit tax of $4.80 is imposed on sellers. d. Suppose that a price floor of $12.80 put in place in this market. Would the resulting Deadweight Loss under this policy be greater than, less than, or equal to the Deadweight Loss which results when a per unit tax of $4.80 is imposed on buyers? Explain. e. Suppose that a price ceiling of $7.20 is put in place in this market. Would the resulting Deadweight Loss under this policy be greater than, less than, or equal to the Deadweight Loss which results when a per unit tax of $4.80 is imposed on sellers? Explain. $ Q Demand Supply 0 0 12.80 11.20 8.00 6.40 4.80 900 1,400 1,600 2,200 2,950 3.203) Consider a market in which ppD 100000,5)(−= and ppS 400)( = . a. In the absence of government intervention, determine the equilibrium price and quantity in this market. Graphically illustrate this outcome, identifying Producers’ Surplus, Consumers’ Surplus, and Deadweight Loss. b. Suppose the government imposes a price floor of 15=p . Describe the outcome in the presence of this price ceiling. Graphically illustrate this outcome, identifying Producers’ Surplus, Consumers’ Surplus, and Deadweight Loss. c. Suppose the government imposes a price ceiling of 5=p. Describe the outcome in the presence of this price floor. Graphically illustrate this outcome, identifying Producers’ Surplus, Consumers’ Surplus, and Deadweight-Loss. d. Suppose the government imposes a price ceiling of 15=p . Describe the outcome in the presence of this price floor. Graphically illustrate this outcome, identifying Producers’ Surplus, Consumers’ Surplus, and Deadweight-Loss. e. Suppose the government imposes a price floor of 5=p. Describe the outcome in the presence of this price floor. Graphically illustrate this outcome, identifying Producers’ Surplus, Consumers’ Surplus, and
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