Price Theory Study QuestionsSet #1
SUPPLY AND DEMAND
1. Use supply and demand curves to analyze the effects on the equilibrium P and Q of rice for each of following cases.
a. A sharp increase in the demand for dairy products. Hint: rice and alfalfa (a crop that is used mainly for feed for
dairy cattle) are both heavily irrigated crops.
b. The development of new fertilizers that increase rice yields.
c. New information on the health hazards of meat consumption.
d. A fall in income. Assume that rice is a normal good.
e. An increase in wages that farm workers could earn in the urban sector (assume that overall income levels are
unchanged).
f. Government programs which subsidize the price of water.
2. Use the following equations to answer the question below.
Q
d
= 1500  0.5P
Q
s
= 1000 + 2P
a. Find the equilibrium price and quantity.
b. Suppose a perfectlyenforced price ceiling is imposed at a price of $950 per unit. Furthermore, assume that the good
is allocated on a firstcome, firstserved basis. What happens to the cost per unit of acquiring this good (the total cost =
monetary cost + nonmonetary cost)? If everyone values their time at rate of $25 per hour, then what is the equilibrium
number of hours spent waiting in line?
3. Use the following equations to answer the questions below.
Q
d
= 1100  5P
and
Q
s
= 100 + P
a. Find the equilibrium price and quantity.
b. Assume that sellers are granted a $20 perunit subsidy. What is new price paid by consumers for this good? What is
the new total price (total price means price inclusive of subsidy) received by sellers? What is the new equilibrium
quantity? What happens to consumer surplus? .
..to producer surplus? What is the total cost of this subsidy to the
government? What is the deadweight loss equal to?
c. Assume instead that the $20 perunit subsidy if granted to buyers. Answer the same questions given in part (b).
d. Calculate e
s
and e
d
at the original price and quantity. Using these elasticity values, verify your answers to part (b)
and (c) by using the following
dP
d
= [(e
s
)/(e
s
e
d
)][dSubsidy].
Now use DWL =0.5(dS/P
0
)
2
[(e
d
*e
s
)/e
s
e
d
)] [P
0
Q
0
] to
verify your deadweight loss answer to part (b). Note: P
0
and Q
0
are the original values for price and quantity.
4. Kalamazoo County raises revenue through a tax on workers: everybody who has a job in Kalamazoo County must
pay a tax of $25 per year. It has been proposed that this tax be abolished and replaced by a tax on businesses equal to
$25 per employee per year. Use a supply and demand graph to show that the economic incidence is the same under
either tax.
5. Suppose that the only way to reach a certain restaurant is by train, and the train fare is $3. One day a law is passed
requiring the restaurant owner to provide free transportation to his restaurant, which he does by making an
arrangement with the railroad whereby his customers ride free and he pays the $3 fare per customer directly to the
railroad.
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
This is the end of the preview.
Sign up
to
access the rest of the document.
 Spring '10
 Jeong
 Government, Supply And Demand, producer, Perunit subsidy

Click to edit the document details