LB5229: Consider a Market with a Demand Equation as P = 100:Economics for a Sustainable World, Singapore

Assignment Questions:

a) Consider a market with a demand equation as P = 100 – 0.5Q and a supply equation as P = 40 + Q, where P is the price in dollars and Q is quantity in units.

(i) With the help of a diagram, establish the equilibrium price and quantity and compute the consumer surplus and producer surplus.

(ii) Suppose the government imposes a per-unit tax of $15 on the producers,  demonstrate the effect of tax using a diagram, and calculate the tax amount paid by the consumer and producer.

(iii) Compute the new consumer surplus and producer surplus. How much has the deadweight loss resulting from the tax?

b) Suppose the suppliers adopt a new production method that is found to increase the risk of cancer for factory workers. The marginal social cost curve considering this external cost is given by P=52+Q.

(i) Is the equilibrium price and quantity in answer a) part (i) efficient?  Discuss using a diagram.

(ii) What is the deadweight loss resulted from the tax imposition on the producer now, taking into account the externality?

Question 2

a) Firm X is producing in a market where there are many small buyers and suppliers, the products supplied are differentiated goods and there are few barriers to entry and exit.

(i) Draw a diagram (with AVC, ATC, MC, MR, and other curves) showing it making an economic loss but does not shut down its business. Indicate loss on the diagram with shaded area.

(ii) Draw a diagram (with LRAC, LRMC, MR, and other curves) to show its economic profit in the long run.

b) Restaurant A and Restaurant B are the only two shops serving Elephant town. Each restaurant can choose to set a high price or low price for their set meals. The payoff matrix below shows the daily profits for each combination of prices that the two restaurants could choose. The first entry shows Restaurant A’s profits while the second entry shows Restaurant B’s profits.

Restaurant B

Low High

Restaurant A

Low High

(i) What are the dominant strategies for both restaurants?

(ii) Which outcome is the Nash equilibrium?

Question 3

By using aggregate supply and aggregate demand curves to illustrate your points,  suppose the economy is initially in long-run equilibrium, discuss the impacts of the  following events on the price level and on equilibrium GDP (Y) in the short run and  long-run:

a) An oil price shock causes cost-push inflation. The government reacts by implementing an expansionary fiscal policy.

b) An increase in government purchases causes demand-pull inflation.

c) The central bank purchases government bonds in the open market.

d) A decrease in consumer demand causes deflation. The government reacts by implementing an expansionary monetary policy.

Question 4

Consider the transaction in a simple economy in 2019:

a) Calculate the GDP for the economy in 2019 and 2020. What is the GDP growth from 2019 to 2020?

b) Given GDP deflator is 100 in the year 2019 and 95 in the year 2020, calculate the real GDP for both years, as well as real GDP growth from 2019 to 2020.

c) Which type of macroeconomic policy you would recommend to the government according to your answer in parts a) and b)?