answerstohomework3summer2015 - Economics 101 Summer 2015...

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ECON MICRO
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Chapter 5 / Exercise 6
ECON MICRO
McEachern
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1 Economics 101 Summer 2015 Answers to Homework #3 Due Tuesday, June 9, 2015 Directions: The homework will be collected in a box beforethe lecture. Please place your name, TA name and section number on 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, 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! 1. Consider the market for watches where the market demand and market supply curves are given by the equations below where P is the price per watch unit and Q is the quantity of watches measured in watch units (that means that you can have fractional units of watches in your answers!): Market Demand: P = 500 – 10Q Market Supply: P = 100 + (10/3)Q a) Given the above information, find the equilibrium price and quantity in this market. Then calculate the value of consumer surplus (CS) and producer surplus (PS). b) Draw a graph illustrating this market and in your graph identify the equilibrium price, equilibrium quantity, all intercepts, the area that is CS and the area that is PS. Suppose that the government in this economy decides to impose an excise tax of $50 per watch on producers of watches. c) Given this excise tax, write an equation that represents the supply curve in this market now that producers have this new additional cost. d) Given this excise tax, find the new price consumers will pay for a watch in this market, the new price producers will receive for a watch in this market once they have met their legal obligation to the government to remit the excise tax, and the new equilibrium quantity of watches that will be sold in this market. e) Given this excise tax, calculate the value of consumer surplus with the tax (CSt), producer surplus with the tax (PSt), tax revenue the government receives from implementing the tax, consumer tax incidence (CTI), producer tax incidence (PTI), and the deadweight loss (DWL) due to the implementation of this excise tax. f) Draw a graph illustrating this market and this excise tax. In your graph identify the price consumers pay for a watch now that the tax has been implemented, the price producers receive once they have paid the government the excise tax, the area of CSt, the area of PSt, the area of CTI, the area of PTI, and the area of DWL. g) Suppose that the government decides it wants to implement an excise tax in this market so that consumption of watches fall to 12 units. Calculate the size of the excise tax that would be needed (assume
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ECON MICRO
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Chapter 5 / Exercise 6
ECON MICRO
McEachern
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