18 Jun WHAT IS THE PER UNIT BURDEN OF THE TAX EXPERIENCED BY CONSUMERS?
1. (20 marks) Suppose that the market for cigarettes is a competitive market
and is described by the following supply and demand functions:
Demand: QD = 80 – 2P
Supply: QS = – 10 + 0.5P
(a) (6 marks) Calculate the equilibrium price and quantity and draw a diagram
to illustrate your answer.
(b)(4 marks) Show on your diagram and calculate the size of the:
(i) Consumer surplus
(ii) Producer surplus
(c) (5 marks) Suppose the government wants to reduce the consumption of
cigarettes to 6 packets. What size specific (per unit) tax will the government
impose on cigarette producers to achieve this outcome?
(d) (1 mark) What is the per unit burden of the tax experienced by
consumers?
(e) (1 mark) What is the per unit burden of the tax experienced by
producers?
(f) (1 mark) What is the total amount of tax revenue raised by the per unit
tax?
(g) (2 marks) According to the supply and demand model is society worse off
or better of as a result of the imposition of the per unit tax? Explain your
answer.
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2. (15 marks)
(a) (4 marks) Consider the following demand schedule for wine:
Price ($) Quantity
0 120
4 100
8 80
12 60
16 40
20 20
24 0
Use the mid‐point formula to make the following calculations.
(i) What is the price elasticity of demand for a price change from $8 to $12?
(ii) What is the price elasticity of demand for a price change from $12 to $16?
(iii) What is the price elasticity of demand for a price change from $16 to
$20?
(iv) What conclusion can you draw about the relationship between price and
the price elasticity of demand along a linear demand curve?
(b) (8 marks) Consider the market for lobsters that is initially in equilibrium at
a price of $40.00 per kilogram and 20,000 kilograms of lobsters exchanged
per week. Then the demand for lobsters increases because price of oysters
increase from $20 per kilogram to $25 per kilogram, so that at a price of
$40.00 per kilogram the demand for lobsters rises to 24,000 kilograms. This
results in a new equilibrium in the market for lobsters at a price of $48.00 per
kilogram and 22,000 kilograms of lobster exchanged per week.
(i) Draw a diagram representing what has happened in the market for lobster.
(ii) Using the mid‐point method, calculate the cross (price) elasticity of
demand between lobsters and oysters. What does this tell you about the
relationship between lobsters and oysters?
(ii) Using the mid‐point method, calculate the price elasticity of supply for
lobsters.
(c) (3 marks) If the short‐run marginal cost and average variable cost curves
for a profit‐maximising firm operating in a perfectly competitive market are
MC = 2 + 4Q and AVC = 2 + 2Q. How many units of output will it produce at a
market price of $10 per unit? At what level of fixed cost will the firm earn
zero economic profit?
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3. (15 marks)
(a) (6 marks) Suppose that a very simple economy produces three goods:
rice, tomatoes and chicken. Suppose the quantities produced and their
corresponding prices for 2014 and 2015 are shown in the following table:
2014 2015
Product Quantity Price Quantity Price
Rice 160 $4.00 180 $5.00
Tomatoes 400 $8.00 320 $10.00
Chicken 200 $16.00 240 $16.00
(i) What is nominal GDP in 2014?
(ii) What is nominal GDP in 2015?
(iii) What is real GDP in 2014, using 2015 as the base year?
(iv) What has been the percentage change in nominal GDP between 2014 and 2015?
(v) What has been the percentage change in real GDP between 2014 and 2015, using
2015 as the base year?
(vi) Calculate the GDP deflator in 2014 and 2015 using 2015 as the base year.
– 6 –
(b) (4 marks) Consider the data below for the labour market of a hypothetical
economy:
Labour Force Survey Categories Persons
Employed 75000
Not in the labour force 70000
Discouraged workers 2000
Persons not employed 80000
Do not want to work 20000
(i) Calculate the unemployment rate.
(ii) Calculate the labour force participation rate.
(c) (5 marks) Suppose an economy has only three goods, and the typical family
purchases the amounts given in the following table. Furthermore, these three good
are included in the basket of goods used to calculate the Consumer Price Index (CPI).
Assume that the base year chosen for the CPI is 2014.
Product Quantity (2014) Price (2014)
Expenditures
(2014) Price (2015) Price (2016)
Computers 5 $1000 $5000 $1200 $1000
Books 20 $30 $600 $25 $35
Burgers 100 $4 $400 $6 $7
Total $6000
(i) What is the value of the CPI in 2014?
(ii) What is the value of the CPI in 2015?
(iii) What is the value of the CPI in 2016?
(iv) What is the annual inflation rate in 2015?
(v) What is the annual inflation rate in 2016?
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