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Homework_8_SOL

# Homework_8_SOL - TAXATION AND GOVERNMENT INTERVENTION...

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Homework 8 1. Suppose that the demand for broccoli is given by: Q D - 1000 - 5P where Q is the quantity per year measured in hundreds of bushel and P is price in dollars per hundred bushels. The long run supply curve for broccoli is given by: Q S = 4P - 80. a) Show that the equilibrium quantity here is Q = 400. At this output what is the equilibrium price? How much in total is spent on broccoli? What is the consumer surplus at this equilibrium? What is the producer surplus at this equilibrium? b) How much in total consumer and producer surplus would be lost if Q = 300 instead of 400? c) Show the allocation of the loss of total consumer and producer surplus between suppliers and demanders described in part b depends on the price at which broccoli is sold. How would the loss be shared if P = 140? What if P = 95?

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d) What would the total loss of consumer and producer surplus be if Q = 450 rather than Q = 400? Show that the size of this total loss also is independent at of the price at which the broccoli is sold. Graph your results.
2. Suppose that the current market price of VCR's is \$300, the average consumer has disposable income of \$30,000 and the price of laser disk players ( a substitute for VCR's) is \$500. Under these conditions the annual US demand for VCR's is 5 million per year. Statistical studies have shown that for this product the own price elasticity of demand is e Q,P = -1.3 , the income elasticity of demand is e Q,I =1.7 and the cross price elasticity of demand is e Q,P' = .8 where P' is the price of laser disk players. Use this information to predict the annual number of VCR's sold under the following conditions: a) Increasing competition from Korea causes VCR prices to fall to \$270 with I and P' unchanged. b) Income and tax reductions raise average disposable income to \$31,500 with P and P' unchanged. c) Technical improvements in laser disk players cause their price to fall to \$400 with P and I unchanged. d) All of the events above simultaneously.

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