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1)Basil’s marginal value of strawberries is MVz = 40 — 0

Economics

1)Basil’s marginal value of strawberries is MVz = 40 — 0.5Q, where Q is the number of strawberries
he eats per day and MV is measured in cents/berry. Clara’s marginal value of strawberries is MV;
= 20 — 0.50, where Q is the number of strawberries she eats per day and MV is measured in
cents/berry. Every morning Basil picks 20 strawberries in his garden & Clara picks 40
strawberries in hers — these are their endowments = the number of strawberries that ripen by that
morning. They trade. Find the equilibrium price at which they trade and find how many
strawberries Basil buys from Clara daily. Show your work. (4 points)
 

2)The demand is given by P = 50 — 2Q, where P is the price and Q is the quantity demanded. Find
the price at which the total expenditure on this good would be the largest. Show your work
(explain your reasoning). (3 points)

3. They call these taxes on alcohol ‘Federal alcohol tax rates’ but they are not really rates per sale
price (like the provincial taxes are, the percent of the selling price). Rather, a flat tax is charged
no matter what the bottle price is. The ‘rates’ are per volume, and they are the same for a bottle of
cheap liquor as for a bottle of expensive liquor. Here’s an excerpt from the regulation:

Spirits containing more than 7% of absolute ethyl alcohol by volume (rate per litre of
absolute ethyl alcohol):
April 1, 2018 to March 31, 2019 $12.11
April 1, 2019 to March 31, 2020 $12.38
Effective April 1, 2020 $12.61
As you can see, the tax increases over time. When one buys a bottle, the tax is simply added to
the price. Ceteris paribus, what does this increasing federal tax means for the average quality of
spirits — does the average quality of alcohol that people buy increase or decrease with the
increasing tax? Explain your reasoning. (3 points)

 

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