Homework #2
1. Consider the market for Coca-Cola. In each of the following cases, indicate what will happen to the equilibrium quantity and price in the market for Coca-Cola. Draw a supply and demand diagram to illustrate each of your answers.
a. The price of plastic bottles increases (assuming that all Coca-Cola is sold in plastic bottles).
b. The price of Pepsi decreases.
c. The government decides to ban soft drinks from public schools.
2. The demand for cell phones is given by the equation p=(4000-qd)/30 and the supply is given by the equation qs=18p-400.
a. Draw the supply and demand curves in this market.
b. Suppose cell phones are selling for $60. Is there a shortage or surplus in the market? If so, what does the surplus or shortage equal?
c. Calculate the market equilibrium, consumer surplus, and producer surplus for cell phones. Draw in these areas on the graph from part (a).
d. Now suppose that the government decides to implement an excise tax on cell phones of $5 dollars per phone. What happens to the equilibrium quantity and price in this market? How much revenue will the government earn from this tax on cell phones?
3. Consider the market for soybeans. The demand curve is given by the equation
p=(-1/10)*qd+700 and the supply curve is given by qs=2p-200.
a. Draw the supply and demand curves for soybeans and calculate the equilibrium price and quantity in the market for soybeans.
b. Bio-diesel is made from soybeans, and in an attempt to lessen the dependence on foreign oil, the government establishes a price subsidy for producers of soybeans of $60 per bushel. What is the new equilibrium price and quantity in the market for soybeans given this subsidy?
c. How much does this subsidy cost the government?
4. Consider the market for apartment rentals in Chicago. The price of rent is determined by the following system of equations.
Demand: p=-2qd + 100
Supply: p=qs+50
a. What is the equilibrium price and quantity in the market for apartment rentals?
b. Suppose the government tries to control the rent prices through a price ceiling of $60. What is the new quantity demanded and quantity supplied in this market? Is there a shortage or a surplus? What is the dead weight loss?