Q1. Let the demand and supply curve for some market be given by the equations below:

Demand: Q_d = 8 - 2 * P
Supply: P = 2 + 4 *Q_s

Answer the questions below using both graphs and algebra. You should show the solution both graphically and by solving the appropriate equations.

a. Find the equilibrium price and quantity.

b. Suppose that there is an increase in income. After the change in income the demand curve is given by Q_d = 14 - 2 * P. Find the equilibrium price and quantity

c. What does this change in demand tell us about the good?

d. Suppose that a new and related good is introduced to the market. After the introduction of this new good the demand curve shifts to the left by 3 (i.e. at each price consumers are willing to buy 3 units less of the good). Find the new equilibrium price and quantity.

e. Using a class concept, can you think of an explanation for why the new good may have caused this change in demand?

Q2. The demand and supply curves for fixed gear bikes in Huntington are Q_D = 225 -1.5⋅ P and Q_s =1.5⋅ P - 45 respectively.

A. Find the equilibrium price and quantity

B. What is the Consumer surplus at the market equilibrium calculated in part (1)

Producer surplus, and at the market equilibrium calculated in part (1)

Total welfare at the market equilibrium calculated in part (1)

C. There are too many fixed gear bikes in Huntington and city leaders are looking for ways to reduce the quantity. They are considering policies which would reduce the number of fixed gear bikes.

a. Suppose that municipality imposes a quota of 60 on the number of bikes. What is the Producer surplus?

Consumer surplus?

Deadweight loss? If so, how much?

D. Suppose the municipality imposes a price floor of $110 in the market for fixed gear bikes. What is the

a. Producer surplus

b. Consumer surplus?

c. Is there any deadweight loss? If so, how much?

E. Suppose the municipality decided levy a unit tax $40 on retailers for each fixed gear bike sold.

1. Calculate the new equilibrium price and quantity.

2. What is the

a. Producer surplus

b. Consumer surplus?

c. Price paid by buyers?

d. Price received by sellers

e. What is the tax revenue collected by government?

d. Is there any deadweight loss? If so, how much?

d. Compare the policy options in parts C., D., and E., on the basis of the reduction in fixed gear bikes, revenue, and dead weight loss.

Which option would you recommend?