The demand and supply curves for red pens (used for taking points off from assignments) is given in the figure below.
economics
Description
Econ 107: Principles of Microeconomics Spring 2020
Homework 1
Topic: Economic
Efficiency, Government Price Setting, and Taxes (Ch 4)
One Long Question (30 points in
total):
The demand and supply curves for red pens (used for
taking points off from assignments) is given in the figure below.
a. (2 pts) Find the free market
equilibrium price and equilibrium quantity.
Consumption tax: Now assume that a tax of 30 TL per unit is imposed on red
pens. Show the effects of this tax on Figure 2 and answer the questions below.
b. (3 pts) Find the equilibrium price
and the equilibrium quantity under this tax.
- (4 pts) Find the amount of tax paid by consumers
and the amount of tax paid by suppliers for each unit of red pens.
Explain your answer.
- (4 pts) Comment on the relative price elasticities
of demand and supply in this market. To do so do not calculate the
elasticities but refer to your answers of part (c) about how consumer and
producer is sharing the tax. Briefly explain.
Price-ceiling: The consumption tax imposed decreased the quantity of red
pens bought and sold. Suppose that the government wants to limit the quantity
of red pens bought and sold to the same exact amount as tax did by using
a price ceiling. (There will be no tax this time but a price ceiling, but the
price ceiling is going to limit the amount of red pens traded to the same
amount as tax)
e. (5 pts) Explain what a price ceiling
is and then find the price-ceiling that
would achieve this aim. Use the
Figure 3 to show the effects of this
price-ceiling on the price and on
the amount of good that is bought and sold. Briefly explain your answer.
Welfare comparisons:
f. (6 pts) Compare consumer welfare
in the above scenarios of free market equilibrium, price ceiling and
consumption tax. To do so shade and label the relevant areas and explain.
g. (6 pts) Compare the total welfare
in the above scenarios of free market equilibrium, price ceiling and
consumption tax. To do so shade and label the relevant areas and explain.
