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Question 1

A perfectly competitive industry (e.g., wheat) is in long run equilibrium. Imagine that there is

an increase in the demand for wheat, leading to a sudden increase in the price of wheat. Using a graph for the firm level situation and a graph for the industry level situation, show and explain how this increase in the price generates another long-run equilibrium through the possibility of entry by new firms.


Question 2

The demand curve for Mars bars (deluxe edition) is D(P ) = 200 − 5Pand the supply curve S(P ) = 5P .

a) Show in a graph the demand curve and the supply curve. What is the equilibrium market price? What is the quantity sold in equilibrium?

b) A quantity tax of $2 per unit sold is placed on Mars bars (deluxe edition). In your graph, analyze the effect of the tax by shifting the supply curve upwards. Calculate the new equilibrium price paid by demanders, the new price received by suppliers, and the equilibrium quantity sold.

c) Calculate numerically the deadweight loss due to this tax. In your graph, shade in the area that represents the deadweight loss. Explain intu- itively what the deadweight loss measures.

Question 3

Suppose that the supply curve for a good is vertical while the demand curve slopes downward. If a tax is imposed in this market, who ends up bearing it? Explain graphically and in words.

Top Answer

2) a) Q = 100 and P = 20... View the full answer

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