Introductory Microeconomics: Problem Set 1

  1. The demand curve for a good is given by QD = 20-2P; the supply curve is QS = ½P.

    1. Find the equilibrium price and quantity in this market.
    2. What is the total consumer surplus?
    3. Suppose the government imposes a quantity tax on producers of 5 per unit. Find the equilibrium prices that producers receive and consumers pay, and the changes in consumer and producer surplus. Who is affected more by the tax? Why?
    4. Explain why the equilibrium with the tax is inefficient. Calculate the deadweight loss.
    5. Suppose instead that the government imposes a price ceiling of 4. What will be the effect? How does this outcome differ from the equilibrium with the tax?

  2. The supply of housing in Oxford is almost fixed, due to planning restrictions. Meanwhile, students, academics, and administrators at the University have little to choice but to live here, resulting in a very high cost of living. Describe this situation in terms of supply and demand and analyse the impact of a ceiling on housing prices, considering throughout both the short and long run.

  3. "EU Butter Mountain to Return: The European Commission has announced plans to artificially boost prices by buying up 139,000 tonnes of dairy products at a cost to the public purse of £237 million. From MArch 1 until the end of August, the EU will become the owner of 30,000 tonnes of butter and 109,000 tonnes of skimmed powder milk, paid for at above market cost to support the dairy industry." (Daily Telegraph, 2009). Analyse the effects of this policy on consumers and producers in the market for butter. The Telegraph clearly disapproved; how might you defend this policy?

  4. Suppose the demand and supply functions for a certain good are given implicitly by 4Qd + 3Pd - 80 = 0 and 4Qs - Ps - 40 = 0, where Qd and Qs are, respectively, quantities demanded and supplied. Pd and Ps are the prices paid by consumers and received by producers after taxes.

    1. Assume for now that there are no taxes, so Pd = Ps.

      1. Calculate the equilibrium price and quantity in the market.
      2. Calculate the price elasticity of demand at the equilibrium price.
      3. Calculate the price elasticity of supply at the equilibrium price.

    2. Now assume the government imposes on suppliers a quantity tax of £4 for each unit supplied.

      1. Calculate the new equilibrium prices and quantity in the market.
      2. Calculate the price elasticity of demand at the new equilibrium price Pd*.
      3. Calculate the price elasticity of supply at the new equilibrium price actually received by producers Ps*.
      4. Calculate the deadweight loss imposed by the tax - assuming that the tax revenues will be handed back to the consumers and the producers.

    3. Now assume the government gives to suppliers a quantity subsidy of £16 for each unit supplied.

      1. Calculate the new equilibrium prices and quantity in the market.
      2. Calculate the price elasticity of demand at the new equilibrium price Pd*.
      3. Calculate the price elasticity of supply at the new equilibrium price actually received by producers Ps*.
      4. Calculate the deadweight loss imposed by the subsidy - assuming that the tax subsidies will be financed by the consumers and producers.

  5. In the early 1980s, US President Reagan negotiated a "voluntary export restraint" agreement with Japanese car manufacturers, essentially an import quota. Some of his advisors had recommended a tariff instead. Assuming the tariff would have been a constant amount T per Japanese car sold in the US, with T chosen to achieve the same quantity reduction as the quota actually adopted, how would the price paid for Japanese cars by US consumers have compared under the two policies?

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