Question 1. The demand for wine is given by the equation QD = 500 - 20P, where P is the price of wine per litre and QD is the quantity of wine demanded in litres. The supply of wine is given by the equation QS = 30P.
(a) Solve for the equilibrium quantity and price of wine. Use a wine market diagram to show this equilibrium point.
(b) Suppose that a $1 per litre tax is levied on the wine producers. Calculate the new equilibrium quantity and price of wine after tax. Use a wine market diagram to show this equilibrium point.
(c) Compute the tax revenue collected by the government. Is it correct to say that since the tax is imposed on the wine producers, the tax burden is fully shouldered by the wine producers and the wine consumers did not pay the tax at all? Explain.
(d) Determine the deadweight loss due to the tax.
Question 2. Selina has $30 to spend on ice-cream and sandwiches. Her marginal utility for ice-cream and sandwich for various quantities are shown in the table below:
The price of ice-cream is $3 per unit and the price of sandwich is $6 per unit
(a) Since the marginal utility of sandwiches is higher than that of ice-cream for all units, it is efficient for Selina to spend all her money on sandwiches and buy 5 units of sandwiches but no ice-cream. Do you agree? Explain.
(b) Define and explain the rational spending rule. Apply this rule to identify the possible combinations of ice-cream and sandwiches that may maximise Selina's utility.
(c) Among the combinations in (b), find the combination which Selina maximises her total utility from the two goods.