Download EC 203

EC 203.01
PS: CH 16
FALL 2006
1. The demand function for coconuts on an island is D(p) = 1,200 – 100p and the supply function
is S(p) = 100p. The law used to be that any subject who consumed a coconut had to pay another
coconut to the king. The King then ate all the coconuts he got. But now the king, apparently fed
up with coconuts, decides to sell the coconuts that he collects in the local market at the going
selling price, ps. In equilibrium, the number of coconuts that will now be produced is
a.
100.
b.
200.
c.
600.
d.
400.
e.
300.
2. The price elasticity of demand for a certain agricultural product is constant (over the relevant
range of prices) and equal to –2. The supply elasticity for this product is constant and equal to 3.
Originally the equilibrium price of this good was 45 YTL per unit. Then it was discovered that
consumption of this product was unhealthy. The quantity that would be demanded at any price
fell by 100%. The percent change in the long-run equilibrium consumption of this good was
a.
–100%.
b. –64%.
c. –20%.
d. –60%.
e.
There is not enough information to determine the answer.
3. Daily demand for gasoline at a gas station is described by Q = 980 – 300p, where Q are gallons
of gasoline sold and p is the price in dollars. The station’s supply is Q = 22,980 + 3,000p.
Suppose the state government places a tax of 18 Ykr on every gallon of gasoline sold. What is the
deadweight loss resulting from this tax?
a.
4.02 YTL
b.
0.40 YTL
c.
4.42 YTL
d.
93.42 YTL
e.
58.91 YTL
4. The inverse demand function for bananas is Pd=18-3Qd, and the inverse supply is
Ps=6+Qs, where the prices are in Ykr.
a) If there are no taxes or subsidies, what is the equilibrium quantity? 3 What is the
equilibrium market price?
b) If a subsidy of 2 Ykr per kilogram is paid to banana growers, what happens to the price
received by sellers? What is the new equilibrium quantity? What is the new equilibrium
price received by suppliers? What is the new equilibrium price paid by demanders?
c) What is the change in price as a percentage of the original price? If the cross-price
elasticity of demand between bananas and apples is +0.5, what will happen to the
quantity of apples demanded as a consequence of the banana subsidy, if the price of
apples stays constant?
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