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Principles of Economics - Problem Set 5 Conceptual Questions

1. The document is a set of conceptual questions and problems about principles of economics from Universidad Carlos III de Madrid. It discusses how price controls and taxes impact market equilibrium, consumer surplus, producer surplus, and total surplus. Graphs are used to illustrate these concepts. 2. One question analyzes the effects of imposing a tax per car on the market for new cars. It finds the new equilibrium price and quantity, and how consumer and producer surplus changes. 3. Another problem looks at subsidizing housing and calculates the new equilibrium price and quantity, and changes to consumer and producer surplus from the subsidy.

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36 views

Principles of Economics - Problem Set 5 Conceptual Questions

1. The document is a set of conceptual questions and problems about principles of economics from Universidad Carlos III de Madrid. It discusses how price controls and taxes impact market equilibrium, consumer surplus, producer surplus, and total surplus. Graphs are used to illustrate these concepts. 2. One question analyzes the effects of imposing a tax per car on the market for new cars. It finds the new equilibrium price and quantity, and how consumer and producer surplus changes. 3. Another problem looks at subsidizing housing and calculates the new equilibrium price and quantity, and changes to consumer and producer surplus from the subsidy.

Uploaded by

antialonso
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Universidad Carlos III de Madrid – Department of Economics

Principles of Economics –Problem Set 5

Conceptual Questions

1. With the help of a graph explain why any price different from that in equilibrium implies that the
quantity exchanged in the market is inferior to that in equilibrium. Using the same graph show that when
the quantity supplied equals the quantity demanded social or total surplus is maximized.

2. If the economic authority sets a maximum price below market equilibrium, total surplus is reduced, i.e.,
there is a loss of efficiency. Show graphically how to distribute the lower social surplus between the
consumer and the producer.

3. Perform an analysis similar to the previous question considering imposing a minimum price above the
equilibrium.

4. Why the introduction of a tax causes a reduction in the quantity traded in the market and there is a
discrepancy between the price paid by buyers and the price received by sellers? Does it change the
distribution of the (lower) total surplus when the tax is levied by the consumer and when collected
through the producer? What is different from one case to another? Illustrate the results of the analysis
with linear functions of demand and supply.

5. Explain the impact of a subsidy on the equilibrium and the surplus. What determines the distribution of
the benefit of the subsidy between producers and consumers? Consider a case where supply is inelastic
and demand is elastic and demand is subsidized. Does it make sense to subsidize the demand and the
benefit is primarily for the producer?

Problems

6. The supply curve of new cars is given by S=P and the demand is D=100-P, where Q is expressed in
thousands of cars and P in hundreds of Euros. The government decides to impose a tax on the purchaser
of $ 3,000 per car. Note that in line with the scale of the problem, the amount of tax is 30 = 3,000/100.

(a) What are the equilibrium price and quantity without taxes?

(b) What are the equilibrium price and quantity with taxes?

(c) How the consumer´s surplus and producer´s surplus will change?

(d) How much tax is collected by the State?

7. In the housing market of Benameji the demand is given by D=60-Pd (where Pd is in thousands of
Euros), the offer is given by S=20, i.e. in the market 20 flats are offered independently of the price. The
local government offers a subsidy per house of 10 thousand Euros to buyers.

a) What are the equilibrium quantity and the equilibrium price without subsidy?

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b) What are the equilibrium quantity and the equilibrium price with subsidy?

c) How does the consumer surplus increase or decrease?

d) How does the producer surplus increase or decrease?

e) What is the council spending in this policy of subsidies?

8. According to the graph, a tax on the consumer shifts the demand curve from D1 to D2, the price paid
by buyers after the imposition of the tax is:

a) $3.00.
b) $5.00.
c) $6.00.
d) $8.00.

Other questions

1. In a competitive market, a tax on consumption of $ 1.50 per unit increases the price paid by buyers (tax
included) from $ 0.60 per unit and reduces the traded quantity from 2000 units per day to 1600 units per
day. Suppose that demand and supply curves in this market are linear, hence the tax reduces the producer
surplus:

a) $1080 per day. b) $1440 per day. c) $1620 per day. d) Impossible to determine.

2. Consider a market with the supply and demand functions: S = 10P and D = 48 – 2P. Determine the
effects of imposing a minimum price of 6 and a maximum price of 3.

a) Calculate the price and quantity in equilibrium without minimum and maximum prices.

b) Calculate the quantities traded with maximum and minimum prices.

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c) Calculate the excess of demand and supply with maximum and minimum prices

d) Calculate the welfare losses with minimum and maximum prices.

3. The functions of supply and market demand are S = 400P and D = 1500-100P. Calculate the effect on
price, quantity and social surplus of a tax of one euro per unit paid by buyers/sellers and a subsidy of one
euro per unit paid to buyers/sellers.

a) A tax of 1 euro per unit paid by buyers

b) A tax of 1 euro per unit to the seller

c) A subsidy of 1 euro per unit to buyers

d) A subsidy of 1 euro per unit to the seller

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