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Homework 4 due: Wed 04/09/2008 PART (i): multiple choice question 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 answer d c d b b a,c b c b c b a d d b b f c b d PART (ii): Longer questions the welfare e±ects of four possible policies: price ²oor, price support, production quota and volun- farmers and the cost to the government. All policies distort the market outcome and thus create a deadweight loss. A natural point of comparison is a situation where they all lead to the same market price and thus the same consumer wrong) the farmers the same amount and cost nothing to the government, as long as the quotas are allocated to the most e¢ cient producers. The government may end up wasting some resources in monitoring that the ²oor or quota is adhered to. The price support program and the voluntary are guaranteed a sale at the supported price (price support) or are simply paid not to produce (pro- duction reduction). Both cost money to the government, with the voluntary production reduction program costing less than the price support program. Finally, in terms of deadweight loss, price foor, quota and the voluntary production reduction program generate (approximately) the same amount of losses, while the the price support program is the least e¢ cient because of wasteful production (better not to produce than to produce waste). 2. Suppose the market demand function for ice cream is Q d = 10 2 P and the market supply function is Q S = 4 P 2 ; both measured in millions of gallons of ice cream per year. (i) Calculate the equilibrium price and quantity in the market and the consumer and producer sur- plus under this equilibrium Q d = Q s ! 10 2 P = 4 P 2 ! P = 2 and Q = 6 From the demand and supply curves we can read that the maximum price for the consumer to buy anything is P max = 5 while the minimum price for producers to supply anything is P min = 1 2 : Recall that CS is then (for linear demand curves) 1 2 ( P max P ) Q while PS is 1 2 P P min ± Q: Thus, we have CS = 1 2 (5 2) 6 = 9 and PS = 1 2 2 1 2 ± 6 = 4 1 2 (ii) Suppose the government imposes a tax T = \$0 : 50 on each gallon of ice cream sold. What is the new price paid by the consumers, price received by the producers and the equilibrium quan- tity? Recall that a tax simply drives a wedge between the price that the consumers pay and the price that

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