PS3_Solutions - AEM 4150 PRICE ANALYSIS Fall 2008 Problem...

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AEM 4150 PRICE ANALYSIS Fall 2008 Problem Set #3 Suggested Solutions 1. (a) Alcohol consumption, on buyer. No Child Left Behind is a federal education subsidy, which is received directly by schools (sellers of education). (b) Lunch menu (lower price) versus dinner menu (higher price). Consumers are less price sensitive to dinner prices. (c) ESp < |EDp| (d) Equilibrium price decreases and quantity increases. P S (e) Qm < Qc, Pm > Pc. 2. (a) Ps = 6Q Pd = 12 - 6 Q Solving the above two equations yield: P* = 6 Q* = 1 (b) This is the case B we covered in class: subsidy on seller. Therefore, the new supply curve is: Ps = 6 Q – subsidy = 6Q – 3, the demand curve is still Pd = 12 - 6 Q. Ps = 6Q - 3 Pd = 12 - 6 Q Solving the above two equations yield: P* = 4.5 Q D P* Q* 1
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Q*= 1.25 S P (c) In the new equilibrium with subsidy, buyers pay a price of $4.5 to sellers. Sellers receive a price of $4.5, plus $3 subsidy for each unit. The net seller price is $7.5. Compared with the initial equilibrium, buyers pay $1.5 less, and sellers receive $1.5 more
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PS3_Solutions - AEM 4150 PRICE ANALYSIS Fall 2008 Problem...

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