ps3x101_s03 - What side of the market bears relatively more...

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1. Recall the following two equations that describe market activities in the Cortland NY tire market. Let X=number of tires per month and P=price per tire Demand Equation: X=500-2P Supply: X=-25+P Econ 101 - Spring 2003 - Wissink PS3-XtraQ Due Tuesday 2/25 at the start of class. Place in TAs box in the back Late problem sets will not be accepted. a) Find the market equilibrium price and number of tires traded, i.e., P* and X* and graph the situation. b) Find the own price elasticity of demand and own price elasticity of supply at the market equilibrium. Use the "exact point formula." c) Suppose the mayor of Cortland decides to place a per unit tax of $5.00 per tire on each tire sold. The mayor decides to collect the tax revenue from the suppliers of tires. Determine the new market situation and figure out the economic price incidence of the tax to the demanders and to the suppliers.
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Unformatted text preview: What side of the market bears relatively more of the economic price incidence? d) Suppose INSTEAD OF THE TAX, the mayor decides to enact a $10 per tire SUBSIDY on each tire sold. The mayor decides to send the subsidy payments to the suppliers of tires. Determine the new market equilibrium situation. Include the final price demanders now pay and the final price suppliers now receive. Why might the mayor want to do this? 2. Ophelia is a vegetable farmer in New York State. She prays to her God for a good crop every year. Unfortunately, her wish didn't come true this year, because a tornado destroyed 30% of everyone's crops in New York State. However, she still earned more revenue than she did last year. Assume that the demand for vegetables did not change. How could this have happened? Use demand-supply analysis and the elasticity concept to explain this paradox....
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