Assignment:
1. 12.1, 12.4, 12.6, 12.8, 12.9
2: Suppose the demand curve is given by p=100-q and the supply curve is given by p=3q.
a: What is the equilibrium quantity transacted? What is the equilibrium price?
b: Suppose the government imposes a tax of $20 on each unit of the good. What is the new quantity transacted in the market? What is the new equilibrium price paid by consumers (including the tax)? What is the new equilibrium price received by producers?
c: Who bears the larger burden of this tax? In general, what does this depend on?
d: How much revenue does the government collect in taxes? What is the deadweight loss from this tax?
3. Suppose that some firms are better than others - i.e. that some firms have a lower marginal
cost curve than others. In fact, suppose that there is one firm that has the lowest marginal cost curve, a second firm that has a slightly higher marginal cost curve, a third firm that has a slightly higher MC curve than the second, and so on.
PART A: In a long run equilibrium, illustrate the relationship between the equilibrium price and the ATC curve of the firm with the highest MC curve that is producing this good. Is this firm making long run economic profits?
PART B: Where is this equilibrium price in relation to the other firms' ATC curves? Are these firms making long run economic profits?
PART C: Suppose that demand increases. What happens in the short run to the equilibrium price, the equilibrium quantity transacted in the market and the quantity produced by each firm?
PART D: Continuing with part C, what happens in the long run? Given that firms that did not previously produce this good must be worse (i.e. must have higher marginal costs) than the firm you analyzed in part A, will the price fall back to its original level in the long run?
PART E: Use your answer to part D to determine how the long run supply curve differs when firms are not identical.
PART F: (Not needed for homework) For practice, you can repeat the exercise for the case when demand falls rather than rises.
4. Suppose the government wants to subsidize milk production. Two proposals are on the table: Under Proposal 1, milk producers would receive a $1 subsidy from the government for each gallon of milk they produce; under Proposal 2, milk consumers would receive a $1 subsidy each time they buy a gallon of milk.
a: In the market for milk, which curve shifts under Proposal 1 and by how much? Which curve shifts under Proposal 2 and by how much? Why?
b: Demonstrate the impact of Proposal 1 on the price paid by consumers and the price received by sellers. Similarly, illustrate the impact of Proposal 2. Is there any difference in your two answers?
c: Demonstrate the changes in consumer surplus and consumer surplus.
Illustrate the dead weight loss of the subsidy (making sure you take into account the cost to taxpayers of the subsidy program).
CS PS COST
Without Subsidy
With Subsidy
d: Once the subsidy is in place, would it be possible to design a way to eliminate the subsidy and make everyone better off?