Professor

The Bas 1. The m

a. D

b. W

P* = $15

c. W CS = .5 ×

d. W PS = .5 ×

e. Ww

Consum

r Gregory Cl

Proble

ics

market dema

Draw the dem

What is the e

5, Q* = 40

What is the t

× (25-15) × 4

What is the t

× (15-5) × 40

What would would be the

mers = $200,

lark

em Set 4

and for lemo

mand curve

equilibrium

otal consum

40 = $200

otal produce

0 = $200

be the cost te cost to prod

Producers =

4: Simp

ons is Qd = 1

e and supply

price and qu

mer surplus a

er surplus?

o consumersducers? Wha

= $200, Soci

ple Com

100 - 4P. Th

y curve on th

uantity of lem

at this price?

s in $ of a goat would be t

iety = $400

mpetitiv

he market sup

he same diagr

mons?

overnment bathe total soci

ECN 1A

ve Mar

pply is Qs = 4

ram.

an on selling ial cost in $?

A, Winter 201

rkets

4P - 20.

lemons? Wh?

12

hat

f. Suof $20. Wsurplus? CS = .5 ×PS = .5 ×TS declin

f. S

Taxes in 2. In sevalues, Pr$0.90 perlarge bod a. Su1,000, wh P* = $2, b. Ifthe new e

uppose that tWhat is the n

× (25-20) × × (10-5) × 20nes by $100

Show on a di

n Competitiv

earch of a waresidential car gallon of gady of SUV ow

uppose demahere P is in $

Q* = 1,000

f the fee of $equilibrium p

the governmnew consum

20 = $50 (se0 + 10 × 20 = area of tr

iagram the ar

ve Markets

ay to fund hisandidate Mittas. His oppowners. He w

and for gas is. What is the

gallons

$0.90 is impoprice and qua

ent to suppoer surplus a

ee below) = $50 +$200riangle below

rea that corre

s promised int Romney pronent, Preside

would instead

s given by Qd

e pre-tax equ

sed on the coantity? What

ort Florida farnd producer

0 = $250 (sew = .5 × (20

esponds to th

ncome tax reoposes a "revent Obama, simpose the f

d = 1,250-12uilibrium pr

onsumers wht is the amou

rmers mandar surplus. W

ee below) 0-10) × 20

he loss of tot

eduction, andvenue enhansenses this pfee only on t

25P, and supprice and quan

hat is the newunt of tax rev

ates a minimWhat happen

tal surplus i

d in the interencement" mearoposal may the fat cat oil

ply is given bntity?

w demand cvenue?

mum lemon pns to total

n (f).

ests of familyasure: a "fee"have offend

l refiners.

by Qs = 1,000

curve? What

rice

y " of

ded a

0P –

t is

c. Ifnew equil

d. H Consum e. W The los f. Kthe demasaving fro Kurt’s p 3. Supplatte mark20-2P, an (a) Wha (b) Whaproducer Producethis mark Dea

f the fee of $librium price

How much of

mers pay $

What is the lo

ss of TS un

Kurt Vile, fresand curve forom Kurt's pr

proposal w

pose the city ket is perfectnd supply is g

at is the befor

P* = 2, Q*

at is the new s? What is th

P* = 3, Q*

rs bear noneket the prod

dweight los

0.90 is impose and quantity

f the tax is pa

$720 ( = $0

ss of total su

nder each

sh from an Er insulin is ineroposal in $?

would avoi

of Davis imptly competitivgiven by P=2

re tax price a

= 16

price and quhe deadweig

= 14,

e of the tax,ducers get n

ss = .512 =

sed on the pry? What is th

aid by the co

0.80×900) o

urplus (in $)

tax = $45

Econ 1 class, elastic at Qd

id any Dea

poses a luxurve. Suppose 2, where P is

and quantity

uantity sold afght loss (per

, consumersno surplus. T

= $1

roducers whahe amount o

onsumer unde

of the tax

from each t

= .5 × 0.9

suggests that= 900. Wha

adweight L

ry tax on lattalso demandin $.

sold (per hou

fter the tax? r hour) from

s bear all theThey thus c

at is the newof tax revenu

er each prop

burden un

tax?

9×100 = are

t Romney shat is his ration

Loss. The

te producers d for latte’s (

ur)?

How much the tax?

e tax burdencannot bear

w supply curvue?

posal?

nder both

ea of DL t

hould instead nale? What i

e saving w

of $1 per lat(per hour) is

of the tax is

n. The reasr any of the t

rve? What is

proposals

triangle

tax insulin, sis the net soc

would be $4

te. Assume given by Qd

paid by the

son is that intax burden.

s the

s.

since cial

45.

the =

n

(c) The excess burden of a tax is the social cost (in $) of raising each dollar of tax revenue. It is thus the deadweight loss divided by the tax revenue. What is the excess burden of the $1 latte tax? Revenue = 114 Excess Burden = (1/14) 7% of the tax revenue (d) Draw a graph of tax revenue (on the vertical axis) versus the size of the tax (on the horizontal axis), showing where it intersects the axis. In the 1980s this diagram was known as the Laffer Curve. Notice that it implies that at some levels of taxation revenue will increase when tax rates are reduced. The formula here from imposing a general tax of t, is Revenue = taxquantity = 2t(8-t)

Price Floors 4. Suppose that in San Francisco the demand for taxi rides per hour is given by Qd = 120 – 5P, while the supply is given by Qs = -30 + 10P. The market is competitive. (a) Draw the supply curve and demand curve.

0

5

10

15

20

25

30

35

0 2 4 6 8 10

Revenue ($)

Tax per unit ($)

(b) What P* = 10, (c) In anquantity o Q = 60 (d) Expla At the hi60. To r$3 per rid (e) Showper hour. See the t$15

t is the equili

Q* = 70

effort to raiof rides?

ain why there

igher price teduce the sude waiting f

w the area of

triangle betw

ibrium price

se drivers’ in

e is a rent see

there is an eupply to equfor custome

deadweight

ween Q = 60

of a taxi ride

ncomes the ci

eking loss an

excess suppual the demrs.

t loss from th

0 and Q = 7

e, and the qua

ity mandates

nd the form t

ly of rides pmand drivers

his policy on

70 in the figu

antity of ride

a $12 minim

the rent seeki

per hour of 9s have to be

n your diagram

ure above. D

es per hour?

mum fare. W

ing loss will t

90, comparespending th

m and calcul

DWL = (12-

What is the ne

take.

ed to demanhe equivalen

late the amou

-9)×(70-60)/

ew

nd of nt of

unt

/2 =

(f) Show the area of rent seeking loss and calculate the amount. Rent seeking loss = (12-9) × 60 = $180. On the diagram this is the bold rectangle. (g) Explain what happens to the drivers’ producer surplus as a result of the fare rise. Is the average driver better off or worse off after the fare increase? After taking account of the Rent Seeking Loss, the producer surplus will fall by $65 per hour. At free market equilibrium, PS = (10-3) ×70/2 = $245. With the minimum fare PS = (9-3) ×60/2 = $180. (h) Suppose instead the Mayor limits the number of taxi licenses, so that there are only enough taxis to supply 60 rides per hour. Calculate the deadweight loss from this, the rent seeking loss, and the gains or losses in drivers’ producer surplus. Is the quota on licenses more or less effective as a way of raising drivers’ income than the price floor? (assuming quota allocated to the drivers with the minimum cost of supply) DL = $15 RSL = $0 PS = (12-9) ×60 + (9-3) ×60/2 = $360. A quota is thus in the short run more effective as a way of raising drivers incomes. (i) Suppose taxi licenses are not tradable. They have to be used by the person they were assigned to. In the long run (say 20-30 years from now) what is the deadweight loss from this, the rent seeking loss, and the gains or losses in drivers’ producer surplus. DL = $15 RSL = $180 PS = (9-3) ×60/2 = $180. Drivers stay in the industry who would otherwise retire or find other jobs. (j) Suppose instead taxi licenses are tradable. They can be sold by the person they were originally issued to. Explain what happens in the long run now. DL = $15 RSL = $0 PS = (12-9) ×60 + (9-3) ×60/2 = $360. The recipients of the quota will sell their licences to the lowest cost producers. They will gain the full value of what would otherwise be the rent seeking loss, $180 per hour. Price Ceilings 5. "Arugula" is a popular restaurant because the food is good and the owners, Benjamin and Sally, charge prices just high enough to cover the car payments on their Volvo. As a result there is always a long line for tables, especially on weekend nights, where the wait is typically an hour. Suppose

demand fsupply is a. Dequals the

P* = 20. b. Wsocial cos Cost = $ c. OBenjaminsnacks. Eof their p

for meals at Afixed at Qs =

Draw a diagrae supply? W

At P = 10,

What, in $s, isst?

10*80 = $80

Observing then and Sally buExplain usingpricing policy

Arugula is giv= 80. Benjam

am of the maWhat is excess

excess dem

s the social c

00 per night.

e long lines ouild a special g a diagram wy.

ven by Qd = min and Sally

rket for meas demand at P

mand is 90-80

cost of Benja

. Excess wa

of people waiwaiting area

what the effe

100 - P, whey, however, ch

ls at ArugulaP = $10?

0 =10.

amin and Sal

aiting by cu

iting, and wisa with seats wct is of their

ere P is the pharge only $

a. What is th

lly's good inte

ustomer crea

shing to sparwhere they se

further good

price in $. Su10 for the m

he price at wh

entions? Wh

ates a cost o

re them the derve free wined intentions

uppose also tmeal.

hich the dem

hat creates th

of $10 per m

discomfort, e and whole on the social

the

mand

his

meal.

grain l cost

The meaexampleexpand tshift upwseeking l d. Kurt Vand Sally'Saturday his pet Roand Sally social co YES. Thshortens e. Rrid of Ku If the valno-one lothen thes

al cost to thee, spend $5 pto equal in twards of theloss thus in

Vile, a rabid f's refusal to cnight with a ottweiler "Mreluctantly p

ost. Is he cor

he waiting ts.

Reluctantly Beurt. Is anyon

lue of waitinoses. If somse people w

e customer per custometime the $15e demand cucreases.

free marketecharge a highlarge whip fl

Maggie T." Thprosecute Kurrect?

ime still cos

enjamin and e harmed by

ng time is thme people hwould lose th

has to be $2er making th5 surplus nowurve by $5, t

er and militaher price. Helailing at the his diminisheurt for his act

sts $10 per p

Sally raise pry this decision

he same for have a lower hrough mon

20, the markhe wait morw being offethe increase

ary parapherne therefore taBirkenstock

es the waitingtivities. Kurt

person, but n

rices to the len? Explain.

everyone, tvalue waitin

ney as oppos

ket price. Ifre attractive,fered. One wed value of th

nalia enthusiaakes to hangicrowd to th

g time at Arut argues in co

now that it

evel at which

then Benjamng time thased to time

f Benjamin a, then the wway to portrhe meal. T

ast, is incenseing outside Ae snarling ac

ugula to 5 miourt that his

is more unp

h demand equ

min and Sallan the margirationing.

and Sally, fowait has to ray this is ashe area of re

ed by BenjamArugula on a companimeninutes. Benjaactivities had

pleasant it

uals supply to

ly benefit, aninal custom

or

s a ent

min

nt of amin d no

o get

nd mer,

f. Trseason bypeople wh"Maggie T Most of twould on 6. In Bis given bapartmen

a. W

b. W

roubled by thy announcingho ask for thT" and his B

the money wnly like rand

erkeley thereby Qd = 2000nts in the sho

Will there be

Will there be a

he profits theg that 9 am ohe money at toy Scout Tro

will be lost adom distribu

e is a rent con0 - P, where Port-run. Rent

any deadwe

any rent see

ey are now mon Decembertheir house. oop. Why? W

as rent seekution of gift

ntrol ordinanP is the montts are fixed a

eight losses f

king losses?

making Benjar 24, 2000 thKurt is enraWould any d

king as peopts.

nce. Supposethly rent in $t $400.

from the ren

If so, how m

amin and Salley will give $

aged and pickdistribution s

ple line up to

e that the ma$. Market sup

nt controls? E

much? Expl

ly celebrate th$100 to each kets the distrischeme satisf

o claim the

arket demandpply is fixed

Explain.

lain.

he Christmasof the first 1ibution with fy Kurt?

gift. Kurt

d for apartmeat Qs = 1400

s 100

ents 0

7. In bolicense, g a. W

oth NYC andetting a build

Why is waiting

d in India theding permit, a

g costly to so

ere are long land so on.

ociety and wh

lines for mos

hat is the stan

st governmen

ndard solutio

nt services -

on to the pro

getting a driv

oblem?

ver’s

b. W

c. Tin line for"waiters"

8. The Californiatuition anstate studexplain in The beloleast par

9. The randomlyhalf their increased

Why is that so

There is now ar those who create stron

University oa. For exampnd fees. Out dents $15,123n what forms

ow market fertially comp

University oy chosen facumarket valu

d by the cost

olution not im

a class of peocan afford toger argumen

f California sple in 2011-1of state stud

3 in tuition ans that loss wil

fee imply thaeted away in

f California, ulty and staffe. The housof living inde

mplemented?

ople who earo pay them. nts for the ma

still charges w12 the Univerdents at Davind fees. Expll appear.

at students n two forms

Davis sells hf who have nes have to beex. Explain w

?

rn their livingWhy does tharket solution

well below thrsity of the Pis paid $38,00plain why thi

gain a surpls.

houses in Aggot purchasede sold back twhy this poli

g in both Nehe existence on to the prob

he market priPacific in Sto01. In comps should crea

lus from the

gie Village, cd a home in tto the universlicy implies re

ew York and of these profblem?

ice for a collckton charge

parison UC Date a rent see

e university.

close to downthe private msity at the puent seeking

India by waifessional

ege degree ined $36,390 foDavis chargedeking loss, a

. This will b

ntown Davismarket for aburchase price loses.

iting

n or d in-and

be at

, to out

Not all the gap between the market price and the university price will be competed away, but at least some will be lost in the following ways:

(1) Faculty who value the houses at less than the market value – because they are bigger than they desired, or smaller, or in the wrong part of town, or without the right size of garden - will still agree to buy them.

(2) Faculty will delay buying a house on the private market to remain eligible for a ticket in the faculty house lottery

(3) Faculty will accept a house even if they are liable under a lease for a year’s rent of their current house or apartment.