Problem_set2

# Problem_set2 - Econ 100 Winter 2012 Problem set 2 Due...

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1 Econ 100 Winter 2012 Problem set 2 Due January 27 1. Consider that the U.S. supply of ethanol follows the function S ( p ) = 5p, and that the US demand for ethanol is D ( p ) = 13.5 – 2.5 p. Without any government role, there are in equilibrium 9 Billion gallons/year transacted at a price of \$1.80/gallon. a. Calculate the supply and demand elasticities at this market equilibrium point. Now consider that the government is going to provide a subsidy of \$0.60/gallon in order to stimulate this market. In other words, the government will provide funds that allow the price paid by customers to be 60 cents/gallon lower than the price earned by suppliers. b. Using supply and demand curves, draw the equilibrium points before and after the provision of the 60 cent/gallon subsidy. c. Calculate the new price earned by sellers, the price paid by customers, and the equilibrium quantity sold in the market (again with the 60 cent/gallon subsidy).

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2 2. Consider a person with preferences over two goods, coffee and cigarettes. Both of these
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## Problem_set2 - Econ 100 Winter 2012 Problem set 2 Due...

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