Lecture 2 Practice Questions

From Frank text: In-chapter exercises 2.1-2.4, 4.5-4.6.

Additional questions:

1. The supply and demand for vodka are given by the following equations:

P = 100 - 0.15Qd P = 20 + 0.05Qs

(a) What are the market equilibrium price and quantity for vodka? (b) Suppose the government imposes a price ceiling of $30 on vodka. What outcome do you predict, using the standard supply-and-demand model? Use specific numbers in your answer. (c) Calculate the consumer surplus, producer surplus, transfer, and dead-weight loss for part b. (d) What are some other ways that vodka producers might react to the price ceiling, other than just changing quantity? [Hint: Think about what happens in rent- controlled markets, aside from simple housing shortages.]

2. The supply and demand for clove cigarettes are given by the following equations:

P = 10 - 0.001Qd P = 2 + 0.004Qs

(a) What are the market equilibrium price and quantity for clove cigarettes? (b) Now suppose the demand curve changes to P = 12 - .001Qd. What are the new market equilibrium price and quantity? (c) State at least three things that could cause the shift described in part b.

3. Discuss the efficiency of rent control, using both the Pareto criterion and the Kaldor- Hicks criterion. Be sure to identify the different groups of "winners" and "losers" from the implementation of rent control.

4. The demand for light beer is given by P = 8 - 0.004Qd. Find the price elasticity of demand when P = 6. Then find the price elasticity of demand when P = 3. Then find the price where the demand curve is unit elastic.