Government Policies

1) The market for pizza has the following demand and supply schedules:
a. Graph the demand and supply curves. What are the equilibrium price and quantity in this market?
b. What will happen to Qd and Qs if government introduces a price ceiling = $5?
What will happen to Qd and Qs if government introduces a price floor = $8?
c. Calculate Price elasticity of Demand if Price increases from $6 to $8? It is elastic good, why?
Calculate Price elasticity of Supply if Price increases from $6 to $8? It is elastic good, why?
d. What is Income elasticity of Demand? How is it calculated? What is the difference between normal
and inferior goods?
e. If cross-price elasticity for hamburgers is 0.89, are the goods complements/ substitutes or unrelated?
f. On the graphs show the areas for Consumer surplus, Producer surplus and Deadweight Loss?
g. Now suppose the government introduces a tax= $1 on producers? What will be new equilibrium
quantity? What is Price paid by consumers? Price received by producers? How is the tax burden shared
between Producers and Consumers?
h. Draw the relevant graphs with tax. Show new Consumer Surplus, Producer Surplus, Government
Revenue and Deadweight Loss.
Additional Problems:
Open-ended question #1 (10 points total)
Suppose that tennis rackets and tennis balls are complement goods.
a. In the space below, show the demand and supply in tennis rackets markets. Label the graph and
clearly show which line is demand (D) and which line is supply (S) curve (1 point)
b. On your graph, show the market equilibrium price (Pm) and quantity (Qm) (1 point)
c. Suppose that tennis becomes very popular sport and that Almaty akimat builds tennis courts in
many parks of the city.
I. Show the changes in demand and or supply that will be observed because of the
described change. (1 point).
II. Show the new equilibrium price and quantity (1 point).
III. Will the price for rackets increase or decrease? (1 point)
d. On a second graph, show the market for rent of football fields and label it properly (1 point)
Make sure that you label the graph “Market for rent of football fields”. Consider football as a
substitute for tennis and assume that if people choose to play tennis, they have less time left for
football.
e. What will happen in the market of rent of football fields as a consequence of more tennis courts
available in Almaty? Show the changes on your graph. (1 point)
f. Now suppose that the government decides to impose an effective price floor on football fields.
Show the price floor on your graph. How will the number of people who rent football fields
change, after the price floor is imposed? Show the new quantity of football fields rents on your
graph and label it Qf. (1 point)
g. Will the market experience excess or deficit of football fields available for rent? Show it on your
graph (1 point)
h. On the same graph, show the deadweight loss in the market for football fields rents. (1 point)
Open- ended question #2 (10 points total)
Suppose that the demand is described by the following function: P=397-2Q. Supply is described by
P=100+0.7Q. The graphs of demand and supply are represented below
450
400
350
300
250
200
150
100
50
0
0 20 40 60 80 100 120 140 160 180 200
a. On the graph above, label the axes and the lines that represent demand and supply. (1
point)
b. The equilibrium price equals ______________. Show your calculations in the empty
space below. (2 points)
c. Calculate the consumer surplus and show your calculations below (2 points)
Suppose that the government imposes per-unit tax of $30 per each unit sold. As a result, the
consumer retail price for the product increases to $200.
d. What is the quantity of product sold after the tax is imposed? Q = ________ (1 point)
e. The price received by the suppliers after the tax is imposed is _________ (1 point)
f. Has the consumer surplus changed after the tax is imposed? If yes, then how did it
change (increased or decreased)? Shade the area that represents the consumer surplus
after the tax is imposed, on the graph (1 point)
g. The deadweight loss to the economy after the tax is imposed equals ___________.
Show your calculations below (2 points)
The following graph shows the weekly market for craft beer in some hypothetical economy. Suppose
the government levies a tax of $46.40 per case. The tax places a wedge between the price buyers pay
and the price sellers receive.
Complete the following table by filling in the quantity sold, the price buyers pay, and the price sellers
receive before and after the tax.
Using your answers from the previous table, calculate the tax burden that falls on buyers and on
sellers
The following graph shows the weekly market for sweatpants in some hypothetical economy. Suppose
the government levies a tax of $40.60 per pair. The tax places a wedge between the price buyers pay
and the price sellers receive.
Complete the following table by filling in the quantity sold, the price buyers pay, and the price sellers
receive before and after the tax.
Using your answers from the previous table, calculate the tax burden that falls on buyers and on
sellers

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1) The market for pizza has the following demand and supply schedules:

b. What will happen to Qd and Qs if government introduces a price ceiling = $5?

What will happen to Qd and Qs if government introduces a price floor = $8?

Open-ended question #1 (10 points total)

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