Suppose the inverse demand and supply curves are given by (where Qs and Qd are quantities P is price): Demand: P = 35 – (1/3) Qd Supply: P = 5 + (2/3) Qs
(a) Calculate the equilibrium price and quantity in this market. Graph the demand and supply curves and illustrate your equilibrium point.(b) Calculate both the elasticities of demand and supply at the equilibrium point. How would a small increase in the number of firms supplying this market affect total consumer spending on the good? Explain. (c) Suppose the government institutes a price floor equal to $28. What is the quantity actually traded on the market? Is there an excess supply of created by this policy? Calculate and illustrate your answers. (d) Does the policy cause deadweight loss in the market? If so, calculate the deadweight loss and illustrate it in your diagram. (e) Suppose that instead of the price floor the government chooses to levy a $9/unit tax on sales of this good. What is the quantity sold in the market? What price do consumers pay? producers receive? Calculate the burden of the tax for consumers and producers on a per unit basis.
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