1. Use the accompanying graph 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 all 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?
d. Calculate the level of consumer and producer surplus when demand and supply are given by D and S0 respectively.
e. Suppose demand is D and supply is S0. Would a price ceiling of $2 benefit any consumers? Explain.
2. Consider a market where supply and demand are given by Qx d = 92 − 2Px and Qx s = Px − 16. Suppose the government imposes a price floor of $40, and agrees to purchase any and all units consumers do not buy at the floor price of $40 per unit.
a. Draw a diagram and show you this case graphically.
b. Determine the cost to the government of buying firms’ unsold units.
c. Compute the lost social welfare (deadweight loss) that stems from the $40 price floor.
3. You are a manager in charge of monitoring cash flow at a company that makes photography equipment. Traditional photography equipment comprises 40 per cent of your revenues, which grow about 2 percent annually. You recently received a preliminary report that suggests consumers take three times more digital photographs than photos
with traditional film, and that the cross-price elasticity of demand between digital and disposable cameras is -0.3. In 2012, your company earned about $600 million from sales of digital cameras and about $400 million from sales of disposable cameras. If the own price elasticity of demand for disposable cameras is -2, how will a 4 percent decrease in
the price of disposable cameras affect your overall revenues from both disposable and digital camera sales?
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