solutionsps7f06 - Problem Set 7 Suggested Solutions 1...

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Problem Set 7 Suggested Solutions 1. Question 5, page a. The program will cost the government more than $50 million if the excess supply (Q D -Q S ) is more than $50 million. The excess supply will be more than $50 million if the supply curve is relatively elastic and the demand curve is relatively elastic (in other words if the quantities supplied and demanded are very responsive to price changes). The figures below illustrate one case with relatively elastic curves and another case with relatively inelastic curves. b. When the demand curve is perfectly inelastic, the loss in consumer surplus is the highest possible and in this case it equals $50 million [(0.5)(100 million pounds)]. If the demand curve has any elasticity at all, the loss in consumer surplus would be less than $50 million. In the figure below, the loss in consumer surplus is area A+B if the demand curve is D and only area A if the demand curve is D’.
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2. Question 6, page 334 a. From the table you should pick two points for demand and two points for supply. Use the two
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