Question 1. Good X is produced in a competitive market using input A. Explain what would happen to the supply of good X in each of the following situations.

a. The price of input A decreases.

Hint:

1. Draw the demand and supply curves. Label each curve and identify the initial points (D0, So , E0 , P0 and Q0 ).

2. Now, show which curve (demand or supply) will be affected if the input cost of A decreases and why? Is it the demand or the supply and label accordingly (D1, or S1 ).

3. What is the new equilibrium? Label as P1, Q1 and E1

4. Give an interpretation as to the new price (higher or lower) and the new equilibrium quantity (higher or lower). Review the topic on Comparative statistics.

b. An excise tax of $3 is imposed on good X.

Hint: Here, again begin your analysis from the initial values of equilibrium as given under comparative statics.

c. An ad valorem tax of 7 percent is imposed on good X.

Hint: Use comparative statics and show how the supply curve will be affected under this situation.

d. A technological change reduces the cost of producing additional units of good X.

Hint: Use the approach given under part (a) of this question.

Question 2. Suppose demand and supply are given by Qd = 14 -1/2P and Qs = 1/4P - 1.

a. What are the equilibrium quantity and price in this market? Show your work?

Hint:

1. Draw the demand and supply graph and label all initial points ( D0, S0, P0, E0), following the use of comparative statics

2. Set demand equal to Supply and solve the values. See page 62 for a practice problem

3. Next, insert the values in the graph.

Question 3.

Use the accompanying graph on page 71 to answer these questions.
a. Suppose demand is D and Supply is S0. If a price ceiling of $6 is imposed, what are the resulting shortage and full economic price?

b. Suppose demand is D and supply is S0. If a price floor of $12 is imposed, what is the resulting surplus? What is the cost to the government of purchasing any and unsold units?

c) Suppose demand is D and supply is S0 so that the equilibrium price is $10. If an excise tax of $6 is imposed on this product, what happens to the equilibrium price paid by consumers? The price received by producers? The number of units sold.