ProbSet1 - Middle East Technical University Department of...

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Middle East Technical University Spring 2011 Department of Economics ECON 201 Erol Çakmak TA: Osman Değer PROBLEM SET 1 1. Suppose the market for grass seed can be expressed as: Demand: Q D = 100 ‐ 2p Supply: Q S = 3p a. At the market equilibrium, calculate the price elasticities of supply and demand. Use these numbers to predict the change in price resulting from a specific tax. b. If government imposes a $5 specific tax to be collected from sellers, what is the price consumers will pay? How much tax revenue is collected? What fraction is paid by sellers? c. If government imposes a 10% ad valorem tax to be collected from sellers, what is the price consumers will pay? How much tax revenue is collected? d. Price elasticity of supply is constant at 1. If the supply curve is changed to Q = 8p, price elasticity of supply is still constant at one. Yet with the new supply curve, consumers pay a larger share of a specific tax. Why? 2. Suppose that a market has the following supply and demand equations:
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