Hand in Questions Econ 1101

Hand-in Questions - Week 12 (by Shaira Rahman - z5059151)

Question 1a) D                                                               b) C

Question 2a) B                                                               b) C

Question 3a)

The equilibrium price would increase as the supply (MC) curve shifts to the left after the tax was imposed. The producers/sellers would have to pay a tax of $6 per unit of good they sell. Equilibrium price will increase the equilibrium quantity will decrease (resulting in a reduction in consumer surplus)

The new price recieved by the seller after the tax was imposed is given by : P= 4Q(supply) +6

New equilibrium quantity

P=4Q+6                          4Q+6 = 12- 2Q

P=12-2Q                        4Q+2Q = 6

                                        6Q=6

                                        therefore Q=1 (after tax)

therefore the price recieved by the sellers after the tax was imposed (for 1 unit) is:

P= 4(1) +6

P= $10

3b) Consumer Surplus (area depicted in the graph above) = 1/2 x 2 x 1= 1 unit

Producer Surplus (area depicted in the graph above) = 1/2 x 4 x 1 = 2 units

therefore, Total economic surplus (area depicted in the graph above) = 1 +2 = 3 units

Tax revenue (area depicted in the graph above) = 6 x 1 = 6 units

3c) Deadweight loss (area depicted in the graph above) = 1/2 x 6 x 1 = 3 units

4) In a perfectly competitive market (PCM), the producers and consumers are price takers that are able to choose how much good they can produce but they have no effect on the price at which they can sell their goods. In saying that, there is no individual economic effect of a good and the demand curve for the PCM is generally horizontal (perfectly elastic) in the long run where the marginal revenue is constant and equal to the market price.

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