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Question 1 (Market Demand and Equilibrium) Suppose the demand for cigarettes is perfectly inelastic, while the supply of cigarettes slopes upward from left to right

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Question 1 (Market Demand and Equilibrium) Suppose the demand for cigarettes is perfectly inelastic, while the supply of cigarettes slopes upward from left to right. The equilibrium price of cigarettes is $5 and the equilibrium quantity is 100 packs. a) Draw the market for cigarettes given the information above. Label the equilibrium point, axes, and any intercepts b) What would happen if the price of cigarettes were $6 per pack and not at the equilibrium of $5 per pack? Would it stay at $6 per pack? Briefly explain. c) Suppose that as a result of government anti-smoking campaigns, the demand for cigarettes decreases to 80 packs (but is still perfectly inelastic). What would happen to the equilibrium price (increase, decrease, not change)? What is the new quantity? Question 2 (Equilibrium) A store in downtown San Francisco is debating whether to have a sale (decrease prices) on shoes this coming holiday season. The owner remembers that in 2017 the sale on shoes increased her revenue from shoe sales. In 2018, the shoe sale caused a decrease in revenues from shoe sales. a) What can we conclude about the price elasticity of demand in 2017? Briefly explain. Page 2 b) What can we conclude about the price elasticity of demand in 2018? Briefly explain. Question 3 (Equilibrium) The supply and demand curves for nights at hotels in San Francisco are given by: D(p)=400-p S(p)=p Suppose the government imposes a tax of $20 per night in order to increase its revenues. a) What is the original price consumers pay per night? What is the new price consumer’s pay per night? What is the new price hotels receive per night? What is the change in quantity with the implementation of the tax? b) What is the city of San Francisco’s

Econ 301 – Homework 5 Due Date: May 11, 2021 Dr. Chenghao Hu Name: Section: ID: Question 1 (Market Demand and Equilibrium) Suppose the demand for cigarettes is perfectly inelastic, while the supply of cigarettes slopes upward from left to right. The equilibrium price of cigarettes is $5 and the equilibrium quantity is 100 packs. a) Draw the market for cigarettes given the information above. Label the equilibrium point, axes, and any intercepts b) What would happen if the price of cigarettes were $6 per pack and not at the equilibrium of $5 per pack? Would it stay at $6 per pack? Briefly explain. c) Suppose that as a result of government anti-smoking campaigns, the demand for cigarettes decreases to 80 packs (but is still perfectly inelastic). What would happen to the equilibrium price (increase, decrease, not change)? What is the new quantity? Question 2 (Equilibrium) A store in downtown San Francisco is debating whether to have a sale (decrease prices) on shoes this coming holiday season. The owner remembers that in 2017 the sale on shoes increased her revenue from shoe sales. In 2018, the shoe sale caused a decrease in revenues from shoe sales. a) What can we conclude about the price elasticity of demand in 2017? Briefly explain. b) What can we conclude about the price elasticity of demand in 2018? Briefly explain. Question 3 (Equilibrium) The supply and demand curves for nights at hotels in San Francisco are given by: D(p)=400-p S(p)=p Suppose the government imposes a tax of $20 per night in order to increase its revenues. a) What is the original price consumers pay per night? What is the new price consumer’s pay per night? What is the new price hotels receive per night? What is the change in quantity with the implementation of the tax? b) What is the city of San Francisco’s revenue from this tax? Question 4 (Equilibrium) Suppose the demand and supply functions are: D(p) = 200 – 12p S(p) = 4p a) Graph the demand and supply for this market with p on the y-axis and q on the x-axis. Calculate consumer and producer surplus. Page 2 b) In order to increase consumption, the government implements a subsidy of $6 per unit. What is the change in consumer surplus? What is the change in producer surplus? What is the deadweight loss to society? Page 3 Question 5 (Monopoly) Suppose the demand curve of a monopolist is given by p(q) = 20 – q and the cost curve is given by c(q)=q2. a) What is the firm’s profit maximizing level of output? What are profits at this level of output? b) Suppose the government imposes a quantity tax on the monopolist so that it has to pay $4 for every unit it sells. What is the profit-maximizing level of output? What are profits? (Hint: increase the marginal cost by $4) c) What happens to the optimal level of output and profits if the government imposes a lump-sum tax on the monopolist (instead of a quantity tax)? Question 6 (Monopoly). In a market where there is one firm (a monopoly) the inverse demand function is given by: p(q) = 240 – q. The cost for this monopolist is: c(q)=2000+0.5q2 a) What is the monopolist’s profit maximizing level of output? What price will the monopolist charge for this output? What are the monopolist’s profits at this point? Page 4 b) Suppose the government wants to decrease the deadweight loss in this market and makes the monopolist set price equal to marginal cost. How much will the monopolist produce in this case? What will the monopolist’s profits be? Question 7 (Monopoly Behavior). Suppose Ford sells cars in Canada and the US. The inverse demand for cars in Canada is p1(q1)=20,000-20q1. The inverse demand for cars in the U.S. is p2(q2)=25,000-10q2. The cost for Ford of producing cars is given by: c(q)=500,000+20q2. a) How many cars will Ford sell in Canada and at what price? How many cars will Ford sell in the US and at what price? b) What will Ford’s profits be? Page 5 Question 8 (Oligopoly). Suppose the Smartphone market has two firms, Samsung and Apple. Apple is the quantity (Stackelberg) leader in this market. The inverse market demand for Smartphones is p(q) = 820 – 2q. Firm costs are Samsung: c(q)=20q Apple: c(q)=20q a) What is the total quantity of phones produced in the market? How is this total quantity split between Samsung and Apple? b) Suppose Apple decides it wants to produce more and increases output by 1. What are its new profits? (Hint: when firm 1 increases its output, then firm 2 will also change its output according to its reaction function) Page 6