Question

# ECON 1102 - Principles of Microeconomics Fall 2019

Homework Assignment 2

Due

October 22, 2019

1. Provide a brief answer to each of the following questions.

All else the same, the price of apple increases. How does this affect the de-

mand for apples?

A book called

One Apple A Day, Death is Not Far Away

became popular

among consumers. How does this affect the demand for apples?

A recession hits the economy. How does this affect the demand for apples?

Canada stops all imports from South America. How does this affect the supply

of apples?

Some economist suggests that if the current equilibrium quantity is 1,000 units

in a market, a $1 unit tax on the good will generate $1,000 tax revenue for the

government. Do you agree? (Hint: use demand-supply diagram)

2. A consumer's quantity demanded for apple is 40 when the price is 20. When the

price of apples increases to 25, the quantity demanded falls to 30. Based on this

information, answer the following questions:

(a) Using the mid-point method, compute the price elasticity of demand for ap-

ples.

(b) Is demand for apples elastic, unit elastic, or inelastic?

(c) If you are the only seller of apples, given this information, how would you

change the price of apples to increase total revenue?

3. Suppose the inverse demand curve for apple is given by:

P

=

10

Q

d

, and the

supply curve is given by:

P

=

Q

s

.

P

is the price of apples,

Q

d

and

Q

s

is the

quantity demanded for and quantity supplied of apples.

(a) Compute the equilibrium quantity and price. (Hint: find price such that the

quantity demanded is equal to quantity supplied).

1

(b) Compute total consumer surplus, i.e., the area of the triangle bounded by the

demand curve, equilibrium price, and the vertical axis.

(c) Compute total producer surplus, i.e., the area of the triangle bounded by the

supply curve, equilibrium price, and the vertical axis.

(d) Suppose a unit tax of $1 per apple is imposed on consumers. What is the new

demand curve? Assuming that the supply curve remains the same, what is

the new equilibrium price paid by consumers? What is the tax burden born by

consumers? What is the new equilibrium price received by producers? What

is the tax burden born by producers?

(e) Suppose a unit tax of $1 per apple is imposed on producers. What is the new

supply curve? Assuming that the demand curve remains the same, what is

the new equilibrium price paid by consumers? What is the tax burden born by

consumers? What is the new equilibrium price received by producers? What

is the tax burden born by producers?

(f) Compare your answers in (d) and (e), is the distribution of tax burdens be-

tween consumers and producers the same? If so, why? If not, how are they

different?

4. True or False. Also provide a brief explanation. If you use any diagrams, please

clearly label all your curves.

(a) If the current equilibrium price in the market for iphones is $400, then a price

ceiling of $450 will create surplus.

(b) If the current equilibrium price in the market for wheat is $10 per bushel, then

a price floor of $15 per bushel will create shortage.

(c) A binding price ceiling will increase consumer surplus.

(d) Market allocations are efficient because they maximize total consumer surplus.

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