HW_03AK1 - Econ 1101 (Sec46) Due Date: 03/27/08 Student...

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Econ 1101 (Sec46) Due Date: 03/27/08 Student Name: _____________________________ Homework 3 Late submissions will not be accepted. Homework must be typed. For full credit label all graphs, and show your work wherever required. 1. (15pts)Consider the market of higher education in the U.S. Assume that supply is more inelastic than demand. (a) Give a possible explanation for shy supply would be more inelastic than demand. It is hard to hire new professors to supply this market (require time to get a PhD), moreover university/college need time to build new building. Because of this college/university can not easily adjust quantity supplied to a change in price, thus supply is more inelastic. (b) Graphically illustrate the market and indicate the surpluses (taking into account the information on supply and demand). P Q  S CS PS Q* P* 1
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Now suppose the government decides to subsidize higher education by amount s. (c) Graphically illustrate the market after the subsidy. (d) Who receives more of the benefit of the subsidy? Why? Producers receive more of the benefit, since it is the more inelastic party, and the inelastic party receives more of the benefit of a subsidy. (e) Indicate all surpluses (CS, PS and Gov Spending) and the DWL after the subsidy. CS PS Gov TS Before Sub b a - a+b After Sub b+d a+b+c -(b+c+d+e) a+b-e P Q  S Q* D Ps Pd P* a b c d e 2
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2. (20pts) Consider the market for oil. Suppose that that the demand in this market is given by P=350-3Q and the supply is given by P=0.5Q (a) Algebraically determine the equilibrium in this market and illustrate in the graph below. S=D 0.5Q=350-3Q 350=3.5Q Q=100 P=50 (b) Find the Consumer and Producer Surplus. CS=0.5(350-50)=15000 PS=0.5(50-0)=2.500 Now suppose that the government levies a tax of $7 per unit of oil. (c) Find the new equilibrium in the market with tax, what is the price of suppliers, price of consumers and quantity of equilibrium. Illustrate in the graph below. Ps-Pd=Tax 350-3Q-0.5Q=7 343=3.5Q Q=98 Pd=350-3.5(98)=56 Ps=49 (d) Find CS, PS, Gov Revenue and DWL. Illustrate in the graph below, CS = 0.5(350-56)98=14406 PS=0.5(49)=24.5 Gov Rev = Tax*Q=7(98)=686 DWL = TSbefore – Tsafter=17500-(14406+24.5+686)=2383.5 3
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CS PS Gov TS Before Tax c+d+e a+b+f - a+b+c+d+e+f After Tax d a c+b a+d+c+b DWL=e+f (e)Give both the consumer and producer burden after the tax (how much consumers and how much producer pay). Consumer Burden = 50-56=6
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This note was uploaded on 12/07/2009 for the course ECON 252 taught by Professor Vincent during the Fall '08 term at St. Thomas.

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HW_03AK1 - Econ 1101 (Sec46) Due Date: 03/27/08 Student...

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