Exercise 1
A long time ago, in a galaxy far, far away, the long run yearly demand and supply of moisture were Qd = 28 - P/5 and Qs= 4 + P/5.
(Quantity is measured in millions of gallons and price in dollars per gallon)
a) Find equilibrium price and quantity in the moisture market.
b) Draw a diagram to illustrate demand, supply and the market equilibrium.
c) Compute the yearly consumer and producer surplus created by the moisture market.
The government of Tatooine used to run a fillWinWtheWgap price floor program to support farmers' income. Under the program, the government guaranteed farmers a selling price of $65 per gallon by filling the gap between that amount and the lower market price.
d) Find the quantity moisture farmers wished to sell at a price of 65 dollars per gallon.
e) Find the price buyers were willing to pay for that quantity of moisture.
f) How much did the price floor cost the government of Tatooine each year?
g) The program benefitted moisture farmers and their employees. Use the concept of producer surplus to estimate the yearly value of the program to moisture farmers.
h) The program benefitted moisture buyers too. Use the concept of consumer surplus to estimate the yearly value of the program to moisture buyers.
i) What was the yearly deadweight loss created by the moisture fillWinWthe gap price floor program?
Exercise 2
The daily demand for muffins is QD = 800 - 200P (quantities in thousands of muffins). One hundred bakeries produce muffins.
Each bakery has a daily total cost of TC(q)= 0.5q2 + 1q + 10 and, in the short run, the market supply function is QS = 100P - 100.
a) In a diagram, draw the demand and supply of muffins and clearly label the market equilibrium.
b) Find the equilibrium price and quantity of muffins and the consumer and producer surplus created by the muffin market at the
equilibrium.
c) Find the revenue earned by each bakery. From that revenue subtract the bakery's variable cost and compute the firm's short run economic profit.
d) Show that the total short run economic profit of the one hundred bakeries equals the producer surplus at equilibrium. The City levies a tax of $0.75 per muffin collected from bakeries.
e) What is the tax effect on a bakery's total cost, marginal cost and supply of muffins?
f) In your diagram, illustrate how the tax affects the market supply of muffins.
g) What is the deadweight loss of the muffin tax?
h) What is the economic incidence of the muffin tax?
Exercise 3
Canada has 20% of the world known freshwater resources, yet many Canadians believe that the country has little or none to spare. Over the years, U.S. and Canadian firms have struck deals to export bulk shipments of water to droughtWafflicted U.S. cities and towns. Provincial leaders have blocked these deals in British Columbia and Ontario. Use graphs to show the likely outcome of such barriers to exports on the price and quantity of water used in Canada and in the United States if markets for water are competitive. Show the effects on consumer and producer surplus in both countries.
Exercise 4
Tyrell Corporation is the only firm selling genetically engineered organic robots called replicants. The marginal cost of a replicant is MC = 12,500 + Q. The yearly demand for replicants is Qd = 87,500 - P.
a) Find Tyrell Corporation's marginal revenue function.
b) Find Tyrell's Corporation's profit maximizing quantity of replicants.
c) How much profit would Tyrell Corporation loose if it was forced to sell the efficient quantity of replicants?
d) How much consumer surplus would buyers gain if Tyrell Corporation was forced to sell the efficient quantity of replicants?