Economics 473 Spring 2020 Problem Set One

Answers are due in class on Wednesday, February 5, 2020 (16 points) Answer each of the questions below. The questions deal with the following competitive market situation. The current market equilibrium price and quantity are $100 per unit and 10,000 units, respectively. The estimated price elasticity of demand is –0.5; the estimated price elasticity of supply is 2.0. 1. Derive a linear demand function and a linear supply function that are consistent with the situation described above. Show how you arrive at your answers. 2. Graph the demand and supply curves. What is the minimum price required to induce suppliers to offer any of the product? What is the highest price that buyers would be willing to pay? 3. Suppose that the government institutes an excise tax of $15 per unit. Derive the new equilibrium price for the product (the price paid by buyers) and the new equilibrium quantity. Who bears more of the burden of the tax – buyers or sellers? Explain why the tax burden is distributed as it is. 4. Deadweight loss (DWL) is a measure of economic inefficiency in a market. Illustrate the DWL associated with the $15 tax as an area in the supply-demand diagram. Explain in words why the area you show in the diagram is a measure of economic inefficiency. What is the numerical value of DWL for the $15 tax?