Homework 6 Answers

Homework 6 Answers - ECO 301 Intermediate Microeconomics...

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ECO 301: Intermediate Microeconomics Marco A Castaneda Homework 6: Answers 1. ANSWER Consider a competitive market described by the inverse demand and supply functions: Demand: q 70 p = Supply: q 2 1 10 p + = a) The equilibrium price and quantity are determined by the intersection of the inverse demand and supply functions. Therefore, we must have q 2 1 10 q 70 + = This implies q* = 40 and p* = 30 The consumer surplus is determined by the area below the demand curve and above the price. From the graph, we have CS = 800 The producer surplus is determined by the area above the supply curve and below the price. From the graph, we have PS = 400 b) Assume the government implements a tax of t = 15 per unit and assigns the legal incidence of the tax to producers. i. The legal incidence of the tax is on producers. Therefore, the new inverse supply function is given by q 2 1 25 q 2 1 ) t 10 ( p + = + + = Therefore, the equilibrium price and quantity (p t , q t ) with the tax are determined by q 2 1 25 q 70 + = This implies q t = 30 and p t = 40 1
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