Question

Microeconomics FRQ

Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram must have all axes and curves clearly labeled and must show directional changes. If the question prompts you to "Calculate," you must show how you arrived at your final answer. Price per case 0 1 2 3 4 5 6 7 8 9 10 Quantity (millions of cases) 

Question 1 

Assume that sugar-based soft drinks are produced in a market shown on the graph above. Answer the following questions based on the information given in the graph. 

(a) To reduce the consumption of sugary soft drinks, suppose the government imposes a $2 per-unit sales tax on soft drinks, 

(i) Will the price of soft drinks increase by the full amount of the sales tax? Explain. 

(ii) Calculate the tax revenue the government can collect from the sale of soft drinks. Show your work. 

(iii) Will the consumer surplus increase, decrease, or stay the same after the tax? 

(iv) Calculate the deadweight loss created by the tax. Show your work.

Question 2 

Assume that Grainland currently produces wheat and does not trade wheat in international markets. 

(a) Draw a correctly labeled demand and supply graph for the domestic wheat market in Grainland. Label the equilibrium price, Pe, and the equilibrium quantity, Qe. 

(b) Suppose the price of wheat in the world market is lower than the domestic price of wheat in Grainland. Assume now Grainland wants to trade wheat in the world market. 

(i) On your graph from part (a), label the world market price of wheat as PW, and identify the domestic quantity demanded of wheat at PW, as Q3, and the domestic quantity supplied of wheat labeled as Q1. 

(ii) Will Grainland export or import wheat? Explain. 

(c) With international trade in wheat, who will benefit in Grainland: domestic producers, domestic consumers, neither or both? Explain. 

(d) Suppose that the government of Grainland decides to provide a subsidy for wheat farmers to make the country more competitive and sell wheat at the world market price so that all wheat is produced domestically. Show the effect of the subsidy on your graph in part (a).

Answer 1

Answering only first question necessarily

Q1)

Price per case on no c new demand curve 1 2 3 4 5 0 6 7 8 9 10 Quantity

A) demand curve shifts inwards by $2 ,

So at new eqm, Q= 4

then new price = $6

So prices rises by 50% , rises by only 1

from 5 to 6

50% of tax burden is borne by producers

B)tax revenue TR = tax*Q

= 2*4

= $8

C)Consumer surplus will decrease , bcoz price paid rises , & output falls

D) DWL = .5*(6-4)*(5-4)

= .5*2*1

= $ 1

Price per case on no c new demand curve 1 2 3 4 5 0 6 7 8 9 10 Quantity

Answer 2

[REMOVED]

Answer 3

[REMOVED]