Problem Set2 Solutions_Rev1

# Problem Set2 Solutions_Rev1 - BPUB250 Problem Set2 Due...

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BPUB250 Problem Set2 Due: February 8-9, 2012 in Class Question 1 (a) Student demand is now given by Q S = 150-10(P-2)=170-10P if P 17. Total demand is given by Q D = 370-35P if P 8 Q D = 170-10P if 8<P 17 To find the equilibrium price and quantity, we conjecture that the equilibrium price will be less than 8. Then, 370-35P = 65P-250. We get P=6.2 and Q=153. Hence 108 burritos are sold to students and 45 are sold to the general public. (b) At p=6 (before the discount) CS(General Public) = 0.5*50*(8-6)=50 CS(Students)=0.5*90*(15-6)=405 Now the price is 6.2 CS(General Public)=0.5*45*(8-6.2)=40.5 CS(Students)=0.5*108*(17-6.2)=583.2 Change in CS(General Public) = 40.5 – 50 = -9.5 Change in CS(Students) = 583.2-405 = 178.2 Change total CS = -9.5 + 178.2 = 168.7 (Note: If you are calculating the change in total CS from the market demand function, be careful about the kink in the graph) Question 2 (a) Set Q d = Q s 225-20P = 50+35P 55P = 175 P* = 3.18, Q* = 161.36 (b) Price elasticity of demand: ( Q d */ P*)(P*/Q d *) ( Q d */ P*)= -20 from the demand function.

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ε d = ( Q d */ P*)(P*/Q d *) = -20(3.18/161.36) = -0.39 Price elasticity of supply: ( Q s */ P*)(P*/Q s *) ( Q s */ P*)= 35 from the supply function. ε s = ( Q s */ P*)(P*/Q s *) = 35(3.18/161.36) = 0.69 Both price elasticity of demand and supply are inelastic (-1< ε d <0 and 0< ε s <1) Price elasticity of supply is relatively more elastic so we can expect that consumers will suffer more if a specific tax is imposed. (c) With the specific tax, Q s ’ = 50+35(p- τ ) 50+35(p-2) Set Q d = Q s 225-20P = 50+35(P-2) 55P = 245 P* = 4.45, Q* = 135.9 The price consumers pay is 4.45 and the price producers receive is 2.45 (=4.45-2)
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Problem Set2 Solutions_Rev1 - BPUB250 Problem Set2 Due...

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