ch8 - Chapter 8 The Invisible Hand in Action Tuesday July...

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Chapter 8: The Invisible Hand in Action Tuesday, July 13
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QUESTION 1 (equilibrium price) MB = 30 1.5Q MC = 10 + .5Q What is the price at equilibrium? A) 5 B) 10 C) 15 D) 20 E) 30
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answer to question 1 MB = 30 1.5Q MC = 10 + .5Q What is the price at equilibrium? A) 5 B) 10 C) 15 D) 20 E) 30 30 1.5Q = 10 + .5Q 2Q = 20 Q = 10 MB = 30 15 = 15 MC = 10 + 5 = 15
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QUESTION 2 (quantity with price floor) MB = 30 1.5Q MC = 10 + .5Q If there is a price floor (minimum price) of 21, what is the quantity bought and sold? A) 6 B) 10 C) 15 D) 20 E) 22
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answer to question 2 MB = 30 1.5Q MC = 10 + .5Q If there is a price floor of 21, what is the quantity bought and sold? A) 6 B) 10 C) 15 D) 20 E) 22 MB = 30 1.5Q 1.5Q = 30 P Q d = 20 2P/3 Q d (21) = 20 14 = 6 MC = 10 + .5Q .5Q = P 10 Q s = 2P 20 Q s (21) = 42 20 = 22
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QUESTION 3 (marginal benefit at new quantity) MB = 30 1.5Q MC = 10 + .5Q If there is a price floor (minimum price) of 21, the quantity bought and sold is 6. At this quantity, what is the sellers’ marginal cost? A) 6 B) 10 C) 13 D) 21 E) 30
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answer to question 3 MB = 30 1.5Q MC = 10 + .5Q If there is a price floor of 21, the quantity bought and sold is 6. At this quantity, what is the sellers’ marginal cost? A) 6 B) 10 C) 13 D) 21 E) 30 MC = 10 + .5Q MC = 10 + .5(6) MC = 13
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QUESTION 4 (deadweight loss) MB = 30 1.5Q MC = 10 + .5Q What is the deadweight loss associated with imposing the price floor of 21? A) 13 B) 32 C) 4 D) 8 E) 16
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answer to question 4 MB = 30 1.5Q MC = 10 + .5Q DWL = .5(21-13)(4) DWL = .5(8)(4) = 16 A) 13 B) 32 C) 4 D) 8 E) 16
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TAXES ON EFFICIENT MARKETS Suppose that we have an initially efficient market (perfectly competitive, with no externalities), and we apply an excise (per unit) tax. The blue area shows consumer surplus , the red area shows producer surplus , and the green area shows government revenue, G . If t is the tax per unit, and Q is the quantity of the good sold, then G = tQ .
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ELASTICITY AND DEADWEIGHT LOSS When either the supply or demand is highly elastic (sensitive to price changes), then the deadweight loss of taxation tends to be higher, as shown on the left above. If either is perfectly inelastic, then taxation has no deadweight loss.
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ADDING SUBSIDIES TO EFFICIENT MARKETS Adding a subsidy to an already-efficient market can also cause a loss in total economic surplus. Here, the orange area represents the money that the government must pay to support the subsidy, the blue area represents the gain in consumer surplus , the red area represents the gain in producer surplus , and the black area is a deadweight loss, i.e. lost government revenue that doesn’t become either consumer or producer surplus.
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This note was uploaded on 08/03/2010 for the course ECON 1 taught by Professor Bergstrom during the Summer '07 term at UCSB.

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ch8 - Chapter 8 The Invisible Hand in Action Tuesday July...

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