420KSpring10HW5answer - Homework 5 (Total 20 points) Due on...

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Homework 5 (Total 20 points) Due on March 30, Tue. We go over partial equilibrium analysis with a linear inverse demand. The inverse demand function is given by p D ( q ) = 120 - 2 q and the cost function of the representative firm is given by C ( q ) = q 2 . Q1 : Assume that the market is competitive, i.e, the representative firm behaves as a price-taker. (i) What is the inverse supply function p S ( q )? (2pt.) (ii) What are the competitive equilibrium price p CE and equilibrium quantity q CE ? (2pt.) (iii) How much is the total surplus at the competitive equilibrium? (2pt.) (iv) Suppose the government taxes on this good 10 dollars per unit. (a) What is the quantity traded under taxation? (2pt.) (b) How much is deadweight loss due to the taxation? (2pt.) Answer : (i) By the p = MC condition, it is p S ( q ) = 2 q . (ii) From p D ( q ) = p S ( q ), we have 120 - 2 q = 2 q , hence q CE = 30 and the price is 60. (iii) (a) Consumer’s inverse demand measured by ‘before-tax’ price shifts
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420KSpring10HW5answer - Homework 5 (Total 20 points) Due on...

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