Economics 11

Spring 2005

Due Wednesday, Feb 16, 2005                        Homework 4

 

 

Chapter 6 Problems and Applications

 

Do problems 3,  4,  and 9

 

3. a. The equilibrium price is where quantity demanded equals quantity supplied, which is at a price of $8 with 6 million produced and 6 million bought.

Price per Frisbee

Quantity Demanded (millions)

Quantity Supplied (millions)

$11

1

15

$10

2

12

$9

4

9

$8

6

6

$7

8

3

$6

10

1

 

b.  If Congress puts a price floor of $2 above the equilibrium price (remember, the price can’t go below the floor).  Prices cannot be any lower than $10.  At a price of $10, only 2 million frisbees will be sold. 

c.   Now Congress imposes a price ceiling of $9.   The price can’t be any higher than $9.  But the market clearing price was $8, so the government’s price ceiling has no effect.  The price is still $8 and 6 million are sold.

 

4.  a. Here is the initial equilibrium situation:  The price is P1 .  That’s what beer drinkers pay and also what beer producers get. 

 

 

 Now the government requires a $2 tax to be paid on each case and beer drinkers pay the tax.   Suppliers now receive P2-$2 and buyers pay P2.  The equilibrium quantity of beer purchased falls to Q2.  The difference is the amount of the tax.

 

 

 

9.  a.  A tax on gun buyers will shift the demand curve for guns to the left, reducing the quantity sold to Q2 and raising the price to consumers (from P1 to P2) and lowering the price that gun producers get from P1 to P2-tax.

 

 

b.  A tax on gun sellers will shift the supply curve for guns to the left, reducing the quantity sold and raising the price to consumers and lowering the price that gun producers get.  The result is identical to (a).

 

c.  A price floor on guns above the equilibrium price, will reduce the quantity of guns bought but lead to a surplus of guns, since producers will be producing Q3 guns and people will be buying only Q2.

 

d.  A tax on ammunition will shift the demand for guns to the left (a decrease in demand).  That’s because guns and ammunition are compelementary goods, and when the price of one goes up, the demand for the complement falls.