University of Alberta



University of Alberta

Department of Economics

Economics 281 – B1

Intermediate Microeconomics Theory I

L. Priemaza

Assignment #4 – Part A

Due Date: Tues. April 10th, 2PM in the econ main office.

Answer all questions and show all work.

1) The market for bucket hats is characterized by the following demand and supply functions:

Demand: P=140-4Q

Supply: P=20+2Q

a) Find and graph the competitive equilibrium. Be sure to include P-intercepts.

b) Calculate and graph consumer and producer surplus in equilibrium.

c) In order to take advantage of the latest fashion craze, the government imposes a $12 bucket hat tax.

i) Calculate and graphically show the new equilibrium, including the price faced by buyers and sellers.

ii) Calculate and graphically show the new consumer surplus, producer surplus, government revenue and deadweight loss

d) Using elasticity, confirm the tax incidence found in (c).

e) In order to increase national coolness, the government instead decides to offer a $18 bucket hat subsidy.

i) Calculate and graphically show the new equilibrium, including the price faced by buyers and sellers.

ii) Calculate and graphically show the new consumer surplus, producer surplus, government revenue and deadweight loss.

f) The government decides that bucket hats are two expensive and imposes a price ceiling of $52.

i) Calculate and graphically show quantity supplied and quantity demanded.

ii) Calculate and graphically depict (minimized) consumer surplus, producer surplus, and deadweight loss under this price ceiling.

g) Assume instead that the government imposes a $80 price floor.

i) Calculate and graphically show quantity supplied and quantity demanded.

ii) Calculate and graphically depict consumer surplus, (maximized) producer surplus, and deadweight loss under this price ceiling.

h) Assume that the world price of bucket hats is $40.

i) Calculate and graphically show foreign and domestic supply.

ii) Calculate and graphically show consumer and domestic producer surplus.

i) If these imports were prohibited, calculate and graph deadweight loss.

j) Assume that the government allows imports with a $12 tariff.

i) Calculate equilibrium price, foreign supply and domestic supply.

ii) Calculate consumer surplus, domestic producer surplus, government revenue, and deadweight loss under this import tariff. Show graphically.

k) What is the most efficient way to support domestic industries when dealing with imports?

University of Alberta

Department of Economics

Economics 281 – B1

Intermediate Microeconomics Theory I

L. Priemaza

Assignment #4 – Part B

Due Date: Tues. April 10th, 2PM in the econ main office.

Answer all questions and show all work.

2) A monopolist faces the following demand curve:

P=15-2Q

a) Calculate total revenue in formula terms.

b) Calculate revenue gained and lost if quantity increased from 5 to 6.

c) When Q=2, calculate marginal revenue.

d) If MC=3+2Q, calculate the monopolist’s profit maximizing price and quantity.

e) Assuming that AC=3+1/2Q, calculate profit from (d).

[pic]

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Demand: P=15-2Q

P

Q

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