Solutions for Homework 1

Chapter 2: Problem 4

a. Good Z is a substitute for X, while good Y is a complement for X.

b. X is a normal good.

c. QXd = 6,000 - (5,230) - 6,500 + 9(100) + 1/10(70,000) = 4,785

d. QXd = 6,000 - Px - 6,500 + 9(100) + 1/10(70,000) => QXd = 7,400 PX and PX = 14,800 2QXd

Chapter 2: Problem 5

a. Solve the demand function for PX to get inverse demand function: PX = 150 QXd.

b. QXd|Px=45 = 300 2PX = 210, y intercept of PX is 150 => CS = 210(150 45)/2 = $11,025.

c. QXd|Px=30 = 300 2PX = 240 => CS = 240(150 30)/2 = $14,400.

d. As long as low of demand holds a decrease in price leads to an increase in consumer surplus, and vice
versa. There is an inverse relationship between the price of a product and consumer surplus.

Chapter 2: Problem 6

a. Qd = 60 P = P 20 = Qs => Pe = 40 => Qe = 60 40 = 20

b. Effective Pf = 50 > Pe = 40: Qd = 60 50 = 10 < 30 = 50 20 = Qs => Q = 10 and surplus = 20.

c. Effective Pc = 32 < Pe = 40: Qd = 60 32 = 28 > 12 = 32 20 = Qs => Q = 12 and shortage = 16.

Full economic price Pfe is inverse demand at exchanged quantity Pd = 60 Q|Pc = 60 12 = 48 = Pfe.
Chapter 2: Problem 7
a. Qd =14 P = 1/4P 1 = Qs => Pe = $20 => Qd = 14 (20) = 4.

b. Tax of 12 increases Intercept of the inverse supply to P = (12+4) + 4Qs => Qs = P 4.

Qd =14 P = 1/4P 4 = Qs => P = 24 => d
Q = 14 24/2 = 2.

c. Since only two units are sold after the tax and the tax rate is $12 per unit, total tax revenue is only $24.

Chapter 2: Problem 8

a. Shortage is Qd|Pc=6 Qs|Pc=6 = 4 1 = 3 => Pfe = Pd|Q=1 = 12.

b. Surplus is Qs|Pf=12 Qd|Pf=12 = 2.5 1 = 1.5 => Government cost is 12*1.5 = 18.

c. Tax shifts S0 by 6 to S1. Consumers pay P = $12. Producers receive P - T = 6. One unit is sold.

d. CS = 2(14 10)/2 = 4 PS = 2(10 2)/2 = 8.

e. No. At Pc = $2 no output is produced.

Problem Set: Problem 1
a.

Ps = 30 + 1/4Q

Pd = 966.7 1/6Q

b. Qd = 5,800 6P = 4P 120 = Qs => Pe = 5,920/10 = 592 and Qe = 4*592 120 = 2,248

CSe = 2,248(966.67 592)/2 = 421,129

PSe = 2,248(592 30)/2 = 631,688

CSe + PSe = 1,052,817

c. ESf = Qs|Pf Qd|Pf = 4*600 120 (5,800 6*600) = 2,280 2,200 = 80

GSf = Pf(QS|Pf QD|Pf) = 600*80 = 48,000
DWLf = (Qe Qd|Pf)(Pd|Qd Ps|Qd)/2 = (2,248 2,200)(600 580)/2 = 480
CSf = Qd|Pf(966.67 Pf)/2 = 2,200(966.67 600)/2 = 403,337
PSf = Qd|Pf(Ps|Qdf 30)/2 + Qd|Pf(Pf Ps|Qdf) = 2,200(580 30)/2 + 2,200(600 580) = 649,000
DWLf + CSf + PSf = 1,052,817

d. ED = Qd|Pc Qs|Pc = 5,800 6*500 (4*500 120) = 2,800 1,880 = 920

Pfe = Pd|Qs = 966.67 1,880/6 = 653.34
DWLc = (Qe Qs|Pc)(Pfe Pc)/2 = (2,248 1,880)(653.34 500)/2 = 28,214.56
BMGc = Qs|Pc(Pfe Pc) = 1,880(653.34 500) = 288,279.20
CSc = Qs|Pc(966.7 Pfe)/2 = 1,880(966.76 653.34)/2 = 294,530.20
PSc = Qs|Pc(Pc 30)/2 = 1,880(500 30)/2 = 441,800.00
DWLc + BMGc + CSc + PSc (+ rounding error) = 1,052,823.96

e. Pd = 966.671/6Q = (30+60)+Q = Ps => Qt = 12(966.6790)/5 = 2,104 and Pb = 616

Pp = Pb t = 616 60 = 556
TRt = t*Qt = 60*2,104 = 126,240
DWLt = t(Qe Qt)/2 = 60(2,248 2,104)/2 = 4,320
CSt = Qt(966.67 Pb)/2 = 2,104(966.67 616)/2 = 368,904.84
PSt = Qt(Pp 30)/2 = 2,104(556 30)/2 = 553,352 .
TRt + DWLt + CSt + PSt (+ rounding error) = 1,052,816.84
Pd = 966.671/6Q = 1.1(30+Q) = (1+v)Ps => Qv = 12(966.6733)/5.3 = 2,114
Pb = Pd|Qv = 966.67 2,114/6 = 614.34
Pp = Ps|Qv = 30 + 2,114/4 = 558.50
TRv = Qv(Pb Pp) = 2,114(614.34 558.50) = 118,045.76
DWLv = (Qe Qv)(Pb Pp)/2 = (2,248 2,114)(614.34 558.50)/2 = 3,741.28
CSv = Qv(966.67 Pb)/2 = 2,114(966.67 614.34)/2 = 372,412.81
PSt = Qv(Pp 30)/2 = 2,114(558.5 30)/2 = 558,624.50
TRv + DWLv + CSv + PSv (+ rounding error) = 1,052,824.35

Problem Set: Problem 2

a. Qd = 184 20P = 124 + 4P = Qs => Pe = 2.5 and Qe = 134

b. With Pw = 2: Mw = Qdw Qsw = 184 20*2 (124 + 4*2) = 144 132 = 12

c. With tariff = 0.25: Mt = Qdt Qst = 184 20(2 + 0.25) [124 + 4(2 + 0.25)] = 139 133 = 6
Tax revenue = G = t*Mt = 0.25*6 = 1.5
Production inefficiencies = PIt = t(Qst Qsw)/2 = 0.25(133 132)/2 = 0.125
Transfer to PS = Tt = t*Qst PIt = 0.25*133 0.125 = 33.125
Consumption inefficiencies = CIt = t(Qdw Qdt)/2 = 0.25(144 139)/2 = 0.625

d. With quota = 6: Qdq = 184 20P = 6 + 124 + 4P = q + Qsq => Pq = 2.25

Qdq = 184 20*2.25 = 139 and Qsq = 124 + 4*2.25 = 133
Windfall = W = q(Pq Pw) = 6(2.25 2) = 1.5
PIq = (Qsq Qsw)(Pq Pw)/2 = (133 132)(2.25 2)/2 = 0.125
Tq = Qsq(Pq Pw) PIq = 133(2.25 2) 0.125 = 33.125
CIq = (Qdw Qdq)(Pq Pw)/2 = (144 139)(2.25 2)/2 = 0.625

e. Increased demand: Qd = 200 20P

With Pw = 2: Mw = Qdw Qsw = 200 20*2 (124 + 4*2) = 160 132 = 28

With tariff = 0.25: Mt = Qdt Qst = 200 20(2+0.25) [124 + 4(2 + 0.25)] = 155 133 = 22
G = t*Mt = 0.25*22 = 5.5
s s
PIt = t(Q t Q w)/2 = 0.25(133 132)/2 =
0.125
Tt = t*Qst PIt = 0.25*133 0.125 = 33.125
CIt = t(Qdw Qdt)/2 = 0.25(160 155)/2 = 0.625

With quota = 6: Qdq = 200 20P = 6 + 124 + 4P = q + Qsq => Pq = 2.9167

Qdq = 200 20*2.9167 = 141.67 and Qsq = 124 + 4*2.9167 = 135.67
W = q(Pq Pw) = 6(2.9167 2) = 5.5
PIq = (Qsq Qsw)(Pq Pw)/2 = (135.67 132)(2.9167 2)/2 = 1.68
Tq = Qsq(Pq Pw) PIq = 135.67(2.9167 2) 1.68 = 122.69
CIq = (Qdw Qdq)(Pq Pw)/2 = (160 141.67)(2.9167 2)/2 = 8.40