Lesson 7 Assignment 3 - Marcie DeGiovine February 1 2013...

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Marcie DeGiovine 258-10-0153 February 1, 2013 – May 20, 2013 BA635 Lesson #7, Assignment #3: Assume that the supply of tickets to an outdoor music festival in Thousand Oaks, California, is a function of price such that: = - 20 + 80P (Supply) MC = D TC/ D Q = $0.001Q where Q is thousands of refinancing applications processed. Answers: A. From the supply curve: QS = 0.03125P P = $32QS The effect of the 25% import tariff is to shift the supply curve upward. With the 25% tariff: P = 1.25($32QS) = $40QS B. From the graph, it is clear that the equilibrium PC price of $800 is maintained both before and after imposition of the import tariff. Because demand is perfectly elastic, the quantity demanded falls from 25 thousand to 20 thousand units. Price remains the same before and after the imposition of the import tax. Given the drop in output, Chinese producers bear the entire burden of paying for the import tariff in the form of lost sales opportunities. If PC demand is less than perfectly elastic, and it surely is in the long run, then it is reasonable to expect both producers (through lost sales opportunities) and customers (through higher prices) to bear the costs of any such tax imposed on producers. A. With perfectly elastic demand at a price of $1, the supply curve indicates the equilibrium level of output as: QS = -20 + 80P = -20 + 80(1) = 60(000) TR = 60($1) = $60(000) B. QS = -20 + 80P 80P = 20 + QS P = $0.25 + $0.0125QS The effect of the recycling fee is to cause a parallel upward shift in the supply curve. With the 5 cent recycling fee, the new supply curve is: P = $0.25 + $0.0125QS + $0.05 = $0.3 + $0.0125QS 0.0125QS = -0.3 + P QS = -24 + 80P With perfectly elastic demand at a price of $1, this post-recycling fee supply curve indicates the equilibrium level of output as: QS = -24 + 80P = -24 + 80(1) = 56(000) TR = 56($1) = $56(000) It is clear that the equilibrium soda price of $1 is maintained both before and after imposition of the recycling fee.
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