Problem Set 3

# Problem Set 3 - Problem Set#3(due Friday Feb 6 Ec 201...

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Problem Set #3 (due Friday, Feb 6 ) Ec 201 Spring, 2009 Michigan State University L. Martin 1. Price controls. One element of the health care reform package is medical cost controls. Let's consider cholesterol tests and assume that the market is approximately competitive. Demand and supply are given below. demand supply price quantity price quantity \$50 1,000 \$50 10,000 \$45 1,200 \$45 8,000 \$40 1,400 \$40 6,000 \$35 1,600 \$35 4,000 \$30 1,800 \$30 3,000 \$25 2,000 \$25 2,000 \$20 2,300 \$20 1,600 \$15 2,700 \$15 1,100 \$10 3,000 \$10 500 a. Find the market clearing price and quantity. ___________________ b. Suppose that a price ceiling of \$40 is imposed. Will the market clear? Will there be a surplus or shortage? If so, how much will it be? Illustrate your answer with a diagram. c. Suppose that a price floor of \$40 is imposed. Will the market clear? Will there be a surplus or shortage? If so, how much will it be? Illustrate your answer with a diagram.

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2. Tax incidence. Using the same data as problem 1, suppose that a \$15 tax on
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Problem Set 3 - Problem Set#3(due Friday Feb 6 Ec 201...

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