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Unformatted text preview: Economics 104B Old Midterm Exam and Solutions 1. The inverse demand for gasoline is p D ( Q ) = 5- . 002 Q and the inverse supply is p S ( Q ) = 0 . 2 + 0 . 004 Q , where p is in dollars and Q is in gallons. a. Find the competitive equilibrium. Answer: In competitive equilibrium, quantity demanded equals quantity sup- plied. Hence, 5- . 002 Q = 0 . 2 + 0 . 004 Q. (1) Solving equation (1), we get Q * = 800 in competitive equilibrium. This quantity and market demand (or supply) together imply that p * = p D ( Q * ) = 3 . 4 is the competitive equilibrium price. b. If a tax of $1/gal is placed on gasoline soled, find the new competitive equilibrium. c. Illustrate the pre-tax and post tax competitive equilibria graphically. Answer: Since the tax is placed on quantity sold, each firms MC increases by the amount equal to the tax everywhere. It follows that the market inverse demand also increases by that amount everywhere. We have p t S ( Q ) = 1 . 2 + 0 . 004 Q as the new market inverse supply. Repeating the procedure in the solution of partthe new market inverse supply....
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- Spring '10