Econ 101, Fall 2012, Discussion Section 6 TA: Kanit Kuevibulvanich

 

Topics • Quotas • Midterm Practice Quiz

I. Quotas

Domestic demand for coffee (in pounds) is given by the equation: P = 13 – QD Domestic supply of coffee (in pounds) is given by the equation: P = 3QS + 1 The world price of 1 pound of coffee is $4.

a. Assume that this economy is closed to trade. What is the equilibrium price and quantity?

P = $10 and Q = 3 pounds

b. Now assume that this economy is open to world trade. How many pounds of coffee will they import or export?

They will import 8 pounds of coffee.

c. Suppose that the government implements an import quota of 4 pounds cocoa beans.

Calculate the new equilibrium price and quantity, as well as consumer surplus, producer surplus, and license holder revenue from the quota. What is the deadweight loss?

P = $7 and Q = 6 pounds Consumer Surplus = $18 Producer Surplus = $6 License Holder Revenue = $12 Deadweight Loss = $6

 

 

II. Midterm Practice Quiz

1. Supply and demand for lumber are characterized by the following equations: Supply: P = 4Q + 1 Demand: P = 3 – Q

Find the equilibrium price in the lumber market.

a) $2.4 b) $2.6 c) $2.8 d) $3

Use the following information to answer the next two questions.

In one game, it takes Minnesota 10 players to produce a fumble and 7 players to produce a turnover. In one game, it takes Ohio State 5 players to produce a fumble and 6 players to produce a turnover. Both teams have 11 players. 2. With fumbles on the vertical axis, what is the slope of the PPF for Ohio State?

a) –11/6 b) –11/5 c) –5/6 d) –6/5

3. If these two teams were able to trade fumbles and turnovers, what would be an acceptable

price (in terms of fumbles) for one turnover that both teams could agree upon?

a) ½ fumble b) 1 fumble c) 2 fumbles d) There is no price that could be agreed upon by both teams

4. Supply for Brewer Baseball Hats is given by Q = 10 + P. Demand for Brewer Baseball Hats

is given by Q = 100 - 2P. The State of Wisconsin wants more people to sport Brewers hats and decides to offer a subsidy to induce 80 hats to be sold in the market. What is the cost of this program to the State?

a) $4800 b) $5600 c) $60 d) $1200

 5. Consider the market for pizza, which is in equilibrium. Two events take place simultaneously: the price of cheese increases, and it is discovered that pizza contains zero net carbs (note: a recent health study advocates reducing daily carbohydrate intake). What will happen to the equilibrium quantity and to the equilibrium price in the pizza market?

a) The equilibrium quantity exchanged will rise, and the effect on the equilibrium price is ambiguous

 

 

b) The equilibrium quantity exchanged will fall, and the equilibrium price will rise c) The effect on the equilibrium quantity exchanged is ambiguous, and the effect on the

equilibrium price is also ambiguous d) The effect on the equilibrium quantity exchanged is ambiguous, and the

equilibrium price will rise Use the following information to answer the next two questions.

Suppose the demand for widgets is given by P = 12 - Q, and supply is given by P = 2. Furthermore, suppose the government has decided to impose a tax of $3 per widget on producers. 6. What part of the tax incidence is covered by consumers?

a) Consumers pay 33% of the tax incidence. b) Consumers pay 67%of the tax incidence. c) Consumers pay 80% of the tax incidence. d) Consumers pay 100% of the tax incidence.

7. What is the deadweight loss resulting from the imposition of the tax?

a) $9 b) $4.50 c) $3 d) $18

8. The demand for cheese in Madison is determined by QD = 100 – P. The supply for cheese is QS = (½) P – 20. Assume that the unit of prices is US$. What are the consumer surplus (CS) and producer surplus (PS)?

a) CS = $400, PS = $600 b) CS = $200, PS = $400 c) CS = $800, PS = $200 d) CS = $600, PS = $400