Problem Set #3 answer - Econ 101 ANSWERS TO PROBLEM SET 3...

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Econ 101 ANSWERS TO PROBLEM SET 3 Professor Wissink Cornell University 1.(a) At equilibrium X =X , so 520-2p = -200 + 10p Y 720 = 12p Y p =60 and X =400. D S * * (b) At 50 cents, before the tax, the suppliers were willing to supply 300 gallons. After the tax, they will only be willing to supply 300 gallons at a price of 50 + 60 = 110 cents. To supply 200 gallons, they were asking 40 cents before the tax, they will now ask for 40 + 60 = 100 cents after the tax. This type of analysis will be true at every price and quantity on the supply curve. The market supply curve including the tax becomes: X = -200 + 10(p-60) OR p = 20 + .1X + 60, where p S MS MS stands for the price along market supply. (c) See graph above. New market supply curve is S . M (d) Inspecting the graph and/or equations you can see that the equilibrium market price has increased and the equilibrium quantity decreased. However, note that the market price is the price demanders pay. The suppliers receive the market price minus the tax of 60 cents. Specifically, it’s probably best to answer this question using the price functions: p = 260 - .5X and now, with the tax, p = 20+.1X + 60. At equilibrium p = p , so D MS D MS 260 - .5X* = 80 + .1X* Y 180 = .6X* Y X* = 300 Y p = 110 cents and p = 50. Note D S that demanders pay 110 cents, suppliers receive 110 cents from demanders, but suppliers must pay the government 60 cents a gallon so that they only end up netting
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This note was uploaded on 03/27/2009 for the course ECON 1110 taught by Professor Wissink during the Fall '06 term at Cornell University (Engineering School).

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Problem Set #3 answer - Econ 101 ANSWERS TO PROBLEM SET 3...

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