Eco_1_Problem_Set_3

Eco_1_Problem_Set_3 - dollars per drum of lubricant...

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Eco 1 Spring 2007 Problem Set 3 Review the appendix of Chapter 4 of your text, before attempting this one. 1) Suppose you are the vice president of operations of a manufacturing firm, which sells an industrial lubricant in a competitive market. Further suppose that your economist gives you the following supply and demand functions: Demand: Q D = 36 – 3 P Supply: Q S = -4 + P Where P is price in dollars per drum, and Q D , Q S is the quantity in drums. a. Plot the market graphically, showing the equilibrium (make sure you label all axes clearly, as well as any points of intersection). b. Calculate the consumer surplus in the market, in dollars. c. Calculate the producer surplus in the market, in dollars. d. Is there any economic inefficiency in the market? Now suppose the government decides that industrial lubricants generate an unacceptable level of pollution at the market equilibrium quantity of production, and imposes a tax of 4
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Unformatted text preview: dollars per drum of lubricant produced. e. Plot the new equilibrium, showing any changes to the demand or supply curves f. Calculate the new consumer surplus in the market, in dollars. g. Calculate the new producer surplus in the market, in dollars. h. Calculate the revenue generated by the new tax. i. Is there any economic inefficiency at the new market equilibrium? If so, calculate the deadweight loss generated by the new tax. j. What is the incidence of the new tax? Now suppose instead the government introduces a sales tax that is, a tax of 4 dollars per gallon sold (rather than produced). k. Plot the new equilibrium (new starting again from part (d), not part (j)), showing any changes to the demand or supply curves. l. Is the incidence of the tax different to what you found in part (j)? Eco 1 Spring 2007 Problem Set 3 2 ) Textbook question 4.7 (Ch5, p171):...
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This homework help was uploaded on 04/09/2008 for the course ECON 001 taught by Professor Caseyquinn during the Spring '08 term at Lehigh University .

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Eco_1_Problem_Set_3 - dollars per drum of lubricant...

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