Quiz 2-

Please write all answers neatly and legibly.

1. Consider the market for coffee which is initially in equilibrium. Suppose that bad weather hurts the coffee crop this year at the same time that a research study finds that drinking coffee offers major health benefits. What do you predict will happen to the equilibrium price and quantity of coffee relative to their initial levels given this information and holding everything else constant? If the demand or supply curves shift, be explicit in describing these shifts.

2. Consider the market for leather belts. Recent fashion trends suggest that belt wearing is decidedly not fashionable. At the same time, animal rights activist groups protest against those wearing animal products. What do you predict will happen to the equilibrium price and quantity of leather belts relative to their initial levels given this information and holding everything else constant? If the demand or supply curves shift, be explicit in describing these shifts.

3. Suppose the market for lipstick in Utopia is described by the following demand and supply curves:

Demand: P = 100 - Q

Supply: P = 2Q - 50

What is the value of total surplus in this market when the market is in equilibrium? Show how you calculated this value.

4. Suppose that in the market for lipstick in Utopia described in the last question that the government decides they would like to limit the number of lipsticks sold in Utopia to 40 units. The government decides to reach this goal by implementing a tax per unit of lipstick sold (this is an excise tax). How big an excise tax will the government need to implement to reach this goal?

5. Suppose that the market for microwaves in Microland, a small closed economy, is described by the following domestic demand and supply equations:

Domestic Demand: Q = 100 - (1/2)P

Domestic Supply: Q = (1/2)P - 10

The world price of microwaves is $60. Suppose that the government of Microland decides to open the microwave market to trade while simultaneously implementing a tariff that results in the price of microwaves in Microland being $80. How many microwaves will be imported into this market given this information and holding everything else constant? Show how you got your answer.