Wofford Eco 342 Problem Set 8 - 2011 printable pdf download

Wofford Eco 342 Problem Set 8 - 2011

Eco 342

Name____________________________

Problem Set 8

11 March 2011

1. Assume that the market for Cable TV is determined by the following equations:

= 4P,

= 500 – P.

a. Find the equilibrium price and quantity in the Cable TV market. Make a (large) graph

showing the equilibrium point.

a. At equilibrium,

we have:

= Q

4P = 500 – P

5P = 500

P = 100

Q = 4P = 400

b. Suppose Congress imposes a tax T on consumers of Cable TV. On your graph from part a.,

draw an example of the effective demand curve and indicate the new equilibrium quantity and

price, the amount consumers actually pay (P

), and the amount producers actually receive (P

)

once the tax is imposed. Locate on your graph the consumer surplus, producer surplus,

government revenue, and deadweight loss resulting from the imposition of the tax.

b. The tax causes the demand curve

to shift to the left by the amount of

the tax T. At the new equilibrium the

market price and quantity have fallen

compared to part (a).

Producers receive the new lower

market price (P

= P*), while

consumers end up paying

= P* + T. Area A = CS,

Area B = PS,

Area C = Gov’t Revenue,

Area D = DWL

Wofford Eco 342 Problem Set 8 - 2011