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PS4 - METU Department of Economics Econ 101 Introduction to...

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1 METU Department of Economics Econ 101: Introduction to Economics I Sections 01-02-03 2011-2012 Fall Semester Problem Set 4 (Ch. 5 and Appendix to Ch. 5 in Case et al.; and Relevant Parts of Ch. 5&6 in Lipsey et al.) PART A - QUESTIONS Q.1) You are given the demand functions for different five goods as follows: Q D1 = 8 - 2P Q D2 = 9 - 3P Q D3 = 10 - 4P Q D4 = 11 - 5P Q D5 = 12 - 6P a) Find the price and quantity where the price elasticity of demand equals one (unitary elasticity) for each demand functions. b) Over what ranges of prices are demand for each good elastic? c) Over what ranges of prices are demand for each good inelastic? Q.2) The following table shows the price and quantity of brownie in Basri’s canteen for a semester according to average income. Brownie price Quantity demanded (average income is 3000 TL in a semester) Quantity demanded (average income is 5000 TL in a semester) 1 TL 2400 3600 1.5 TL 1600 2800 2 TL 800 2400 2.5 TL 400 1800 a) Calculate the price elasticity of demand (using the midpoint method) if the price of brownies rises from 1 TL to 1.5 TL, when average income is 3000 TL. b) Calculate the income elasticity of demand (using the midpoint method) if average income increases from 3000 TL to 5000 TL, when the price of a brownie is 1 TL.
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2 Q.3) Suppose that the government imposes an excise tax of 2 TL for every bottle of wine sold. Before the tax, the price of bottle of wine is 10 TL. Consider the following five after-tax scenarios. In each case: i) use an elasticity concept to explain the scenario to ii) determine who bears relatively more of the burden of the tax, producers or consumers iii) illustrate your answer with a diagram a) the price of wine paid by consumers rises to 12 TL per bottle. Assume that the demand curve is downward sloping. b) the price paid by consumers remains at 10 TL per bottle. Assume that the supply curve is upward sloping. c) the price of wine paid by consumers rises to 11.50 TL per bottle. d) the price of wine paid by consumers rises to 10.50 TL per bottle. e) the price of wine paid by consumers rises to 11 TL per bottle. Q.4) The market demand and supply functions for a commodity are given as follows: Q D = 100 – 2P Q S = – 20 + 4P a) Find the equilibrium price and quantity. b) Find the point elasticity of demand and supply at the equilibrium. c) Find the price and quantity where price elasticity of demand is unitary. d) Find the maximum expenditures by consumers (TR) given their demand. e) If an excise tax of 6 TLfor each unit of good was imposed by the government to be collected from the suppliers. i. What will be the new equilibrium price and quantity? ii. What will be the tax revenue of the government? iii. How much of this tax will be paid by the consumers and producers? Q.5) The market demand and supply functions for a commodity are given below: Q D = 36 – (1/3)P and Q S = -9 + (1/2)P a) Find the equilibrium price and quantity.
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3 b) Now, assume that the government imposes a tax of 10 TL on producers. Find the new equilibrium price and quantity after the tax.
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