Question

Market demand (D) and supply (S) are the following

GROUP A (1) Market demand (D) and supply (S) are D: P 40-Q, S: P - 3Q. Let Qe Quantity at equilibrium and Pe - Quantity at equilibrium. (a) Compute Qe and Pe and graph the D and S functions in the same graph with P on the vertical axis. (b) Show that at Q1-7, Net Market Benefits (NB) are less than NB at Qe. (c) Show that at Q2- 13, Net Market Benefits (NB) are less than NB at Qe. (d) Compute price elasticity of demand at Qe. What is the Dead-Weight Loss (DWE) at Q1-7? What is the Dead-Weight Loss (DWE) at Q2 13? (e) Compute price elasticity of supply at Qe. (2) Using a D and S graph, discuss the impact of a minimum wage rate on the labor market. Offer at least one possible solution that restores efficiency (3) Using a D and S graph, discuss the impact of rent control on the rental apartments /housing market. Offer at least one possible solution that restores efficiency (4) Using a D and S graph, discuss the impact of a per-unit of production tax on product X and stress the role of D and S elasticities regarding the distribution of the tax burden.

Answer 1

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D: P = 40 - Q, S: P = 3Q a) at eq^m DD = SS, 40 - Q = 3Q 40 = 4Q, thus Q^e = 10, P^e = 30 b) at Q_1 = 7, from DD curve: P = 40 - 7 = 33. At Q_1 = 7, price from SS curve P = 3Q_1 = 21 dead wt loss = 1/2 times [33 - 21] times [10 - 7] = 1/2 times 12 times 3 = 18 Net Market Benefit CNB is sum of producer surplus (P.S) & C.S. TS (at Q = 10) = ABC + BCD. TS (at Q = 7) = Area AEFDBA, thus total surplus is lower \r\n c) Q_2 = 13, P (from DD curve) = 40 - 13 = 27 at P = 27, SS implies Q = P/3 = 27/3 = 9 at P = 9, from DD curve Q = 40 - P = 40 - 9 = 31 so dead wt loss = 1/2