1. Consider the market for Volkswagen cars. that demand and supply curves for cars are given as
Demand: P = 300 - q and Supply: P = 10 + q
Where the price and quantity are in thousands.
a) Find the equilibrium price and quantity in this market.
b) Calculate consumer surplus and producer surplus.
The news broke on media indicating that the car is not as environmental friendly as the company claimed. This new information changed the demand function to P=150-q. assuming the supply did not change
c) repeat part a) and b).
d) calculate consumer surplus, producer surplus and the loss of welfare to the society.
e) Comment on the results from b) and d).
1. Suppose the market for widgets can be described by the following equations:
P = 10 - Q P = Q - 4
where P is the price in dollars per unit and Q is the quantity in thousands of units.
A. What is the equilibrium price and quantity? Suppose the government imposes a tax of RM1 per unit to reduce widget consumption and raise government revenues.
B. What will the new equilibrium quantity be? What price will the buyer pay? What amount per unit will the seller receive?
C. Calculate and compare the consumer surplus, producer surplus, total surplus, tax revenue, and dead weight loss?
1. The elected officials in a west coast university town are concerned about the "exploitative" rents being charged to college students. The town council is contemplating the imposition of a $350 per month rent ceiling on apartments in the city. An economist at the university estimates the demand and supply curves as:
QD = 5600 8P QS = 500 + 4P,
where P = monthly rent in dirhams, and Q = number of apartments available for rent. For purposes of this analysis, apartments can be treated as identical.
a. Calculate the equilibrium price and quantity that would prevail without the price ceiling. Calculate producer and consumer surplus at this equilibrium (sketch a diagram showing both).
b. What quantity will eventually be available if the rent ceiling is imposed? Calculate any gains or losses in consumer and/or producer surplus.
c. Does the proposed rent ceiling result in net welfare gains? Would you advise the town council to implement the policy?
2. John Gardner is the city planner in a medium-sized southeastern city. The city is considering a proposal to award an exclusive contract to Clear Vision, Inc., a cable television carrier. Mr. Gardner has discovered that an economic planner hired a year before has generated the demand, marginal revenue, total cost and marginal cost functions given below:
P = 28 - 0.0008Q
MR = 28 - 0.0016Q
TC = 120,000 + 0.00062Q
MC = 0.0012Q,
Where Q = the number of cable subscribers and P = the price of basic monthly cable service in dirhams. Conditions change very slowly in the community so that Mr. Gardner considers the cost and demand functions to be reasonably valid for present conditions. Mr. Gardner knows relatively little economics and has hired you to answer the questions listed below.
a. What price and quantity would be expected if the firm is a Monopolist?
b. Calculate the consumer surplus, producer surplus, total surplus and deadweight loss?
c. Mr. Gardner has asked you to recommend a price and quantity that would be socially efficient. Recommend a price and quantity to Mr. Gardner using economic theory to justify your answer.
d. Calculate the consumer surplus, producer surplus, total surplus and deadweight loss?
e. Compare the economic efficiency implications of (a) and (b) above. You should include relevant diagrams to demonstrate deadweight loss.
1. Idris produces and distributes the scientific magazine, "the Echonomist." The magazine demand, marginal revenue, total cost and average cost are as follow:
P = 55 - 2q
MR = 55 - 4q
TC = 100 - 5Q + q2
MC= -5+2q
a. If Idris wants to maximize profits,
I. What price does he charge?
II. How much is the profit?
III. What is consumer surplus? Producer surplus? Total surplus?
b. What is the dead weight loss?
c. If Idris wants to maximize total social surplus
I. What price does he charge?
II. What are his profits at this price?
III. What is consumer surplus? Producer surplus? Total surplus?
2. Hilton decides to build a luxury hotel near Genting highlands. The demand function for rooms in the luxury hotel is P=900-0.5q. The hotel total cost of maintaining a room is TC=10+2q2. Therefore MC=4q.
a. What is the equilibrium price and quantity?
b. Calculate consumer surplus, producer surplus and total surplus?
Impose a price ceiling of AED 760,
c. What is the impact of the new price on the market of hotel rooms?
d. What is the new consumer surplus, producer surplus and total surplus?
When comparing old and new consumer surplus, producer surplus and total surplus.
Who gained and who lost? Is the society better off or worse off after the change? Show graphically.