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Problem Set 1

# Problem Set 1 - Problem Set#1 1 The market demand and...

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Problem Set #1 1. The market demand and supply curves for cellular phones are P = 100 - Q and P = 20 + Q, respectively. Determine, and illustrate graphically, the effects of each of the following: a. The government imposes a price ceiling of \$40 per phone and holds a lottery where ration coupons are issued randomly to potential customers. If the government allows resale of coupons, what will the price of a coupon be? Relative to a free market equilibrium, identify gainers, losers, and deadweight losses. b. Same question, but the government prohibits resale of coupons. At the price of \$40, 60 consumers will enter the lottery (why only 60?) and each of these has a 1/3 chance of getting a coupon. Among these consumers, what is the average value of a phone? Use this number to estimate the expected value of the 20 phones. Why is that number less than the area under the demand curve between 0 and 20? What have you learned from these thoughts? c. The government imposes an excise tax of 10 per unit (to be paid by the seller). Explain why the effect is the same if the law requires sellers to pass the tax on to buyers. 2.

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Problem Set 1 - Problem Set#1 1 The market demand and...

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