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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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