ECON 500 Questions for Chapter 7 Questions from the textbook: Review questions 4 and 5 (page 188). Problems 1, 2, 4, 5, 6, and 9 (pages 188-190). 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 in which ppD 6400)(−= and ppS 4)(=. 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 ceiling of 30=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 floor of 50=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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