The demand and supply curves for fixed gear bikes in Hipsterland are QD = 225 ?1.5? P and Qs =1.5? P ? 45 respectively.

(1) Find the equilibrium price and quantity

(2) Find the price elastic of demand and the price elasticity of supply at the equilibrium in part (1)

(3) What are the consumer surplus, producer surplus, and total welfare at the market equilibrium calculated in part (1)

(4) There are too many fixed gear bikes in Hipsterland 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 are the producer and consumer surplus? Is there any deadweight loss? If so, how much?1

b. Suppose the municipality imposes a price floor of $110 in the market for fixed gear bikes. What are the producer and consumer surplus? Is there any deadweight loss? If so, how much?

c. Suppose the municipality decided levy a unit tax $40 on retailers for each fixed gear bike sold. Calculate the new equilibrium price and quantity. What is the incidence of the tax on consumers? On producers? What are the producer and consumer surplus? What is the revenue of the tax? Is there any deadweight loss? If so, how much?

d. Compare the policy options in parts a., b., and c., on the basis of the reduction in fixed gear bikes, revenue, and dead weight loss. Which option would you recommend and why?