2009ps4 - answer key

2009ps4 - answer key - BUAD 351 - Economic Analysis for...

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BUAD 351 - Economic Analysis for Business Decisions Homework 4 PART (i): multiple choice question 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 answer d c d b b a b b c a d b b c d PART (ii): Longer questions 1. Suppose the demand for cars is given by Q d = 12 P; and the supply of cars is given by Q s = 4 P 3 : (i) Find the equilibrium of this market and calculate the consumer and producer surpluses associated with this equilibrium In equilibrium, demand equals supply so 12 P = 4 P 3 ! P = 3 and Q = 9 : To calculate the consumer and producer surpluses, we have CS = 1 2 ( P max P ) Q = 1 2 (12 3) 9 = 40 : 5 PS = 1 2 P P min ± Q = 1 2 3 3 4 ± 9 = 10 : 125 (ii) Suppose that the government imposes a tax T = 5 that has to be paid by the buyers when buying a car. What is the new equilibrium quantity traded, together with the price paid by the buyers ( P B ) and the price received by the sellers ( P S ) ? 12 P S + 5 ± = 4 P S 3 ! P S = 2 and P B = 7 ; with Q = 5 (iii) Under the tax, what are the new consumer and producer surpluses, tax revenue and the dead- weight loss associated with the tax? CS = 1 2 (12 7) 5 = 12 : 5 PS = 1 2 (2 3 4 )5 = 3 : 125 Tax Revenue = 5 ± 5 = 25 deadweight loss = 40 : 5 + 10 : 125 12 : 5 3 : 125 25 = 10 Thus, by raising $25 in tax revenue, the government destroys $10 of surplus (iv) How much of the tax is paid by the consumers and the producers, respectively. How would your answer change if the tax would have been imposed on the sellers instead? Consumers faced an original price of
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This note was uploaded on 04/19/2009 for the course BUAD 351 taught by Professor Eastin during the Spring '07 term at USC.

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2009ps4 - answer key - BUAD 351 - Economic Analysis for...

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