Question

1. Suppose den and for one pound of pork is given by QD = 12 - 2P and supply of one pound of pork is given by QS = -6 + 3P. (a) Solve for the equilibrium price (P) and equilibrium quantity (Q.). (b) Calculate the price elasticity of supply and demand at the equilibrium point. Which is more elastic, demand or supply? (c) The production of pork can pose significant negative effects on the environment and human health. Suppose the external marginal cost of pork production is $0.25 per pound of pork. Solve for the socially optimal price and quantity 2. Determine the effects of the following cases on the price and quantity of pizza sold. (2 points each) The price of beer, a complement to pizza, decreases. (b) The wage of workers in pizza shops increases. (c) Consumers' incomes decrease. Assume pizza is a normal good. (d) The price of burritos, a substitute for pizza, decreases. -- 3. Suppose demand for a pack of cigarettes is given by QD - 10 - 0.5P and supply of a pack of cigarettes is given by QS = -4 + 2P. (a) Solve for the equilibrium price (P) and equilibrium quantity (Q.). (b) Now suppose the government wants to reduce smoking because it produces negative externalities (additional costs on the healthcare system, etc.). To achieve this, they place a $2 tax per pack of cigarettes to be paid by the sellers. That is, the seller must give the government $2 for every unit of beer purchased by consumers. i. How does this affect (shift) demand and/or supply of beer? Which direction? ii. Solve for the new equilibrium price and quantity in the market. iii. Calculate the price sellers receive after paying the tax. Who bears more of the burden of the tax?

Answer 1

Answer 1.a. At Equilibrium, Demand= Supply

12-2P=-6+3P

Equilibrium Price P*=18/5=$3.6

Equilibrium quantity Q*=4.8

b. Price elasticity of demand=(∆Qd/∆P)(P*/Q*)= -2(3.6/4.8)=-1.5

Price elasticity of supply=(∆Qs/∆P)(P*/Q*)= +3(3.6/4.8)=+2.25

Supply is more elastic as the absolute value of elasticity is gteater for supply than demand. 2.25>1.5.

c. Marginal social cost= Marginal private cost+ External cost

New Qs after adding MSC=

Qs*= -6+3(P-0.25)

Neq socially optimal equilibrium: Qs*=Qd

-6+3(P-0.25)=12-2P

Equilibrium Socially optimal Price P*= $3.75

Equilibrium quantity Q*= 4.5

Note-According to HOMEWORKLIB RULES first question is answered