homework 3spring 2015 - Economics 101 Spring 2015...

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1Economics 101 Spring 2015 Homework #3 Due March 19, 2015 Directions: The homework will be collected in a box beforethe lecture. Please place your nameon top of the homework (legibly). Make sure you write your name as it appears on your ID so that you can receive the correct grade. Late homework will not be accepted so make plans ahead of time. Please show your work.Good luck! Please realize that you are essentially creating “your brand” when you submit this homework. Do you want your homework to convey that you are competent, careful, and professional? Or, do you want to convey the image that you are careless, sloppy, and less than professional. For the rest of your life you will be creating your brand: please think about what you are saying about yourself when you do any work for someone else! Part I – Excise Taxes 1. (You are not requiredto plot anything for this part, but, as usual, plotting provides valuable insight into both the calculations and the intuition.) Suppose the market for hot chocolate in January in Madison can be described by the following supply and demand curves: Supply: Qs = 5P – 5 for P Demand: Qd = 100 – 10P for 0 P where Qs is the quantity supplied, Qd is the quantity demanded, and P is the price. a)Find the equilibrium quantity and supply in this market. b)What is consumer and producer surplus in this market? c)Using the point elasticity formula, calculate the price elasticities of demand and supply at the equilibrium point. d)Suppose February is more bitterly cold than usual, increasing demand for hot chocolate by 60 units at any given price. Supply remains as before. Given this information, what is the new equilibrium price and quantity? e)What is the new consumer and producer surplus, CS' and PS'? f)What are the new price elasticities of supply and demand using the point elasticity formula? g)Suppose the city of Madison decides to tax hot chocolate with a $3 per unit excise tax on suppliers. Calculate the equilibrium quantity (Qet ), price (Pet ), consumer surplus (CSt ), producer surplus (PSt government revenue (Govt. Tax Rev.), tax incidence on consumers (CTI), tax incidence on producers (PTI), and deadweight loss (DWL) from this tax for January (before the change in demand). 1 10 ),
2h)What is the ratio of the absolute value of the slope of the demand curve to the slope of the supply curve? What is the ratio of consumer tax incidence to producer tax incidence? Is this a coincidence? Make a conjecture about what the relationship between the two ratios. Briefly discuss an intuition for this result. i)[Note: this is a bit of a CHALLENGE QUESTION: don't despair, but do think!]Without fully solving for it, what would be the deadweight loss if we instead used the demand curve from February (i.e. after the demand shift)? (Draw a quick sketch to see what will happen.) What does this tell you about the relationship between deadweight loss and parallel shifts of one of the curves?

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