Question

# (7 pts) Consider a competitive market where daily supply and demand are QD (P) = 15 – -and QS(P) = 2P, where quantities are measured in thousands of units and prices are in dollarsper unit. Assume that this market does not create any externalities – meaning that all cost sand benefits are borne by the sellers and buyers directly involved in the market. a. Calculate the formulas for the price elasticities of supply and demand as functions of price, then find their values at the equilibrium price. Are the signs consistent with what you were expecting? b. Draw a graph of the market, showing the equilibrium point. Let's say demand changes in the following way: at any given price, the quantity demanded is reduced by 5 units.Could we have expressed this demand shift as a change in inverse demand? How would we have phrased that? Show the new equilibrium in the graph and describe how the market price and quantity have changed – both nominally (in their own units) and in percentage terms. Going back to the initial case, suppose that supply shifts, instead of demand: let's say that the quantity supplied decreased by 5 units at any given price. Could we have expressed this supply shift as a change in inverse supply? How would we have phrased that? Draw a new graph, showing the new equilibrium, vs the one at part (a), and discuss how price and quantity changed (both in units and in percentage terms). Once again, go back to the original case. Describe the impact on the market quantity and surpluses if a price floor of \$4 above the equilibrium price is imposed. Show this outcome and the dead weight loss introduced in a new graph. e. What about if a price ceiling of \$4 below the equilibrium price is imposed? How are consumers and producers each affected, and by how much does total surplus decrease? Show the relevant areas in a new graph. What accounts for the difference between the outcomes at (d) and (e)? Compare the quantity changes, as well as the amounts of dead weight loss created. Go back to the original case. If I told you that a per-unit sales tax was imposed in this market, and that this led the quantity traded to drop to just 10 thousand units per day,would you be able to figure out the \$ value of the tax (both per unit and total)?  Fig: 1  Fig: 2  Fig: 3  Fig: 4  Fig: 5  Fig: 6  Fig: 7  Fig: 8  Fig: 9  Fig: 10