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Unformatted text preview: Econ 301: Solution to Midterm 1 1. [30 points] Suppose that market demand for good X is Q = 100- P , where P is the price of good X in $ and Q is the quantity of good X. Suppose also that the market supply of good X is Q =- 20+2 P . (a) [6 points] Find the inverse market demand and the inverse market supply. (b) [6 points] Graph your (inverse) market demand and (inverse) supply and show the equilibrium (carefully label the axes, the curves, and the equilibrium quantity and price ( Q e and P e )). Which area in the graph corresponds to the market consumer surplus given the equilibrium price you find out, please calculate it. (c) [6 points] The government introduces a specific tax on good X which is charged on producers. The tax is equal to τ = $15. Find the new equilibrium price and quantity ( Q * and P * ). Which area in the graph corresponds to the market consumer surplus with the specific tax given the new equilibrium price, please calculate it. (Hint: you could start with denoting the price payed by consumers as P , the price received by producers as P- τ . ) (d) [6 points] Please calculate the changes of consumer surplus due to the specific tax of τ = $15 on producers. Do consumers benefit or suffer a loss from this tax?...
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This note was uploaded on 03/18/2012 for the course ECON 201 taught by Professor Çakmak during the Spring '10 term at Middle East Technical University.
- Spring '10