ps3x101_s03_answer - Econ 101 - Spring 2003 - Wissink...

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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 ANSWERS a) Find the market equilibrium price and number of tires traded, i.e., P* and X* and graph the situation. Demand equation: X=500-2P. This implies that P D = 250-0.5X. Supply equation: X = -25+P. This implies that P S = X+25. Equating the two prices, we get 250-0.5X* = X*+25. This implies that X* = 150. Substituting into either of the price equations, we get P* = 175. (See graph on next page.) b) Find the own price elasticity of demand and own price elasticity of supply at the market equilibrium. Use the "exact point formula." Own Price elasticity of demand at P* = 175 is (2)*(175/150) = 7/3 Own Price elasticity of supply at P* = 175 is (1)*(175/150) = 7/6 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
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ps3x101_s03_answer - Econ 101 - Spring 2003 - Wissink...

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