Econ 1101 – Lecture 001 – Homework2

                                            Instructor: Salam  Abdus

                                             Due: 29th June,2004

 

Question 1(20 points):-             Consider the market for Apartments in New York City. Assume that the market is perfectly competitive. Suppose that the demand curve for apartments is given byD=12-P. And the Supply curve is given by S=P-2

    

        a. Show , in a graph, the demand and supply curves.What are the equilibrium price(rent) and quantities(number of apartments rented)? Show the TS on graph. Indicate both Consumer’s Surplus and Producer’s Surplus.

        

       Now suppose that the New York city Authority imposed a price ceiling , Pc=3, on rent of apartments in New York.

     

       b. How many apartments will be rented now? What is the size of shortage? Show them on a graph.

       c. Show the Total Surplus of the market under rent control, on graph. Indicate both CS and PS. Also, show the DWL due to rent control.   

 

 

Question 2(40 points):-     Consider the market for luxury cars. Assume that the market is perfectly competitive. Suppose that the demand and supply curves are given by D=10-P and S=P-2  respectively.

 

      a. Draw demand and supply curves for the market (Assume price units as  thousand dollars)on a graph.  Show equilibrium price and quantity, P* and Q*, on graph. Show the TS. Indicate CS and PS.

 

        Now suppose that government introduced a tax of $2000 each car.

       

        b. Show the new equilibrium quantity and equilibrium  price(both consumer and producer price).

        c.Show CS,PS and Government Revenue on your graph. What is the TS? Show the  deadweight loss on your graph.

        d.Now suppose that a new survey showed that demand for luxury cars are more elastic than it was thought to be previously. So consider a demand curve which is more elastic than the one you have considered in question a. Then repeat b) and c).That is, consider the impact of the same tax $5000 in this market with a more elastic demand curve[You can pick any arbitrary demand curve, which looks more elastic than the one considered in a) .You don’t need to calculate new equilibrium price, just show it on graph]. Is the Deadweight Loss smaller or larger in this case ? Show your answer on graph.

 

 

    Question3(40 points):-.Consider the market for Sugar in U.S.. Assume that the market is perfectly competitive.

      a. Draw reasonable demand and supply curves for the market. Show equilibrium price and quantity, P* and Q*, on graph. Show the TS. Indicate CS and PS.

  

      Now suppose that government introduced a subsidy of $2 per ton of sugar produced.

 

        b. Show the new equilibrium quantity and equilibrium  price(both consumer and producer price).

        c. Show CS, PS and Government Expenditure on your graph. What is the TS? Show the  deadweight loss on your graph.