Home-work 2 Nahom Regassa-nmr5442@psu.

edu

1, A. P=60$ and Q=100 Units

B.

i.

Consumer surplus = 1/2 (30*100) = 1500$ units

ii.

Producer surplus= (40*100) = 2000$ units

iii.

Total surplus= Consumer + Producer = 3500$ units

C.

i. (25*52.5) + (0.5*25*7.5) = 1406.25$ units

ii. (0.5*25*10) = 125$ units

iii. (1406.25+125) = 1531.25$ units

iv. (0.5*75*52.5) = 1968.75 $ units

Home-work 2 Nahom Regassa-nmr5442@psu.edu

2.

A. p = % change in quantity demanded/ % change in price in x= -4/30 = -0.133

B. TG = % change in quantity demanded of Toyota Yaris/ % change in price of gasoline=

46/30= 1.53

C. FG = 32/30 = 1.07

D. CG = -35/30 = -1.167

E. FG = -27/30 = -0.9

3.

A.
Home-work 2 Nahom Regassa-nmr5442@psu.edu

B. The fact that the government decided to raise the estimate of the social damage implies that

the current level of production is beyond the social optimal cost. Hence, the new estimates

would raise the costs of production to the optimal level and make it more efficient. Simply

meaning that the final price considers all the opportunity costs.

C. The new estimates imply a higher rate of Pigouvian tax because these taxes are applied to

supplement for lower estimates of the social cost. Because governments use the Pigouvian Tax to

convert the negative externalities of social costs into monetary values, a higher estimate of the

social cost implies a higher tax rate.

4.

A.

i. = (Q2 - Q1)*100 (P2 - P1)*100

(Q2 + Q1)/2 (P2 + P1)/2 -0.8
(20-30)*100 (5-3)*100 =
(30+20)/2 (5+3)/2

ii. (10-20)*100/ (10+20)*0.5/ (10-5)*100/ (10+5)/2 =-1

iii. (5-10)*100/ (5+10)*0.5/ (12-10)*100/ (10+12)/2= -3.67

B. Yes, I would recommend that the seller increase the price since the price elasticity of demand

is inelastic at this point. This means that the seller can increase his/her price without losing a

significant number of customers.

C. I would not recommend a price increase, since the demand is unit elastic at this point. A

change in price would not affect the Total revenue.

Home-work 2 Nahom Regassa-nmr5442@psu.edu

D. I would not recommend a price increase because the demand is elastic at this point. Any

increase in price would significantly lower the quantity demanded and reduce Total revenue.

5.

A.

P=18-0.25Q, so when P=6$ Q=48

p=1/slope* P/Q

=1/-0.25*6/48 = -0.5

B.

When P=15, Q=12

p= 1/slope *P/Q

= -5

C. Yes, I would recommend that the seller increases his/her price since the demand is inelastic at

6$. Total revenue would increase because the price increases and the quantity demanded

decreases by a small margin.

6. I agree with the proposal because demand is inelastic at this point. An increase in price

would only decrease the quantity demanded by a small margin. The increase in price would

outweigh the decrease in quantity demanded and thus increase Total Revenue.