Homework 2

1. Thailand is a small country in the sense that it has no influence on the world price. The domestic demand and supply functions for computers in Thailand are given by Q_d = 2500 - 2P and Q_s = 4P - 500 respectively.

a. What is the formula for calculating the price elasticity of demand?
b. Find the price elasticity of demand for computers at the equilibrium price.
c. Give one example of a price that is in the price elastic range of demand.
(a number)

Now, suppose that the government of Thailand decides to allow international trade for computers. The current price for computers in the international market is $400 per computer.

d. What is the quantity of computers imported by Thailand?
e. Find the net gains from trade (to do this, first calculate consumer surplus and producer surplus without trade and then, calculate consumer surplus and producer surplus with trade and compare the difference in these calculations).

Now, the Thai government wants to encourage the domestic computer industry. Therefore, the government decides to impose a tariff of $50 on imported computers.

f. Under the new tariff program, what is the quantity of computers imported by Thailand?
g. Find the total government revenue from this tariff program.
h. Calculate the deadweight loss from this tariff program.

Now, instead of using the tariff program, the government decides to restrict the maximum number of imported computers to 150 computers.

i. Find the new equilibrium price under the quota program
j. What is the quantity of computers sold by the domestic computer industry?
k. If you were the owner of the domestic computer company, which government program would you like to support? (quota or tariff)
l. Compare the tariff program with the quota program. Which program is better for Thailand? Explain your answer

2. For each of the following pairs of goods, identify which good in the pair has the higher price elasticity of demand. Explain your answers.

a. Coke; entire soft drink industry
b. Visits to the doctor; visits to the baseball stadium
c. Gasoline consumed each year; gasoline consumed each week
d. Insulin for a diabetic; dialysis treatment for someone with kidney disease
e. Water; diamonds

3. An excise tax

Suppose that the demand for light bulbs in Madison is given by Q_d = 50-P while supply is given by Q_s = 4P.

a. Find the equilibrium quantity and price.
b. Find the consumer surplus and producer surplus.

Now suppose that a city of Madison creates an energy saving program. Therefore, it imposes an excise tax of $5/pack on producers.

c. Find the equilibrium quantity and price after the tax.
d. Find the taxes paid by consumers.
e. Find the taxes paid by producers.
f. Find the tax revenue collected by a city of Madison.
g. Find the deadweight loss of this tax program.
h. Suppose that, instead, the demand for light bulbs is given by
Q_d = 80-4P. Use the concept of price elasticity to explain the differences in taxes paid by consumers, taxes paid by producers, and the difference in the deadweight loss between the new demand curve and the old one.

4. A farm support program

Consider the potato market. The demand for potatoes is given by P = 30- 2Q_d and supply of potatoes is given by P = 10+ 2Q_s. Suppose that the government implements a price support program with the price floor set at $24.
a. Calculate the excess demand/supply.
b. Calculate the direct cost of the support program. Suppose further that there is a storage cost of $2 per potato. Find the total cost of the support program.

Suppose that the government implements a price subsidy program instead of the price support program. Let the government target price be $24.

c. What is the cost of the subsidy program?

5. A subsidy program and elasticity

Consider the corn market in the United States and Thailand. Suppose that the demand for corn in the United States is given by P = 60- 7Q_d and the demand for corn in Thailand is given by P = 60 - 5 Q_d. Also, suppose that the supply of corn in both countries is given by P = 5Q_s. Suppose further that the government in both countries implements a price subsidy program with the target price of $35.

a. What is the cost of the subsidy program in each country?

b. What is the deadweight loss of the subsidy program in each country?

c. Use the concept of price elasticity to explain the differences in the deadweight loss of the subsidy program you found in the two markets.