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Exercises Lesson 2

1. This document provides 5 exercises involving the concepts of demand, supply, equilibrium, price floors, price ceilings, taxes, and regulation of monopolies. The exercises analyze how these economic concepts impact quantity, price, surplus, shortage, tax revenue, and social welfare. 2. Questions involve calculating equilibrium price and quantity, effects of price floors and ceilings, tax impacts, and analyzing monopoly behavior and regulation. Graphs and diagrams are provided to illustrate market impacts. Regulated monopoly pricing, output decisions, and deadweight loss are also examined. 3. The final exercise considers a privately owned water monopoly, its profit maximizing price and output, the impact of a price ceiling on profits and shortage, and the

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12 views

Exercises Lesson 2

1. This document provides 5 exercises involving the concepts of demand, supply, equilibrium, price floors, price ceilings, taxes, and regulation of monopolies. The exercises analyze how these economic concepts impact quantity, price, surplus, shortage, tax revenue, and social welfare. 2. Questions involve calculating equilibrium price and quantity, effects of price floors and ceilings, tax impacts, and analyzing monopoly behavior and regulation. Graphs and diagrams are provided to illustrate market impacts. Regulated monopoly pricing, output decisions, and deadweight loss are also examined. 3. The final exercise considers a privately owned water monopoly, its profit maximizing price and output, the impact of a price ceiling on profits and shortage, and the

Uploaded by

ivamci7996
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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EXERCISES

Lesson 2. IntroducƟon to RegulaƟon.


1. Suppose demand and supply are given by Qd = 60 - P and Qs = P - 20.
a. What are the equilibrium quanƟty and price in this market?
60
50 pf
b. Determine the quanƟty demanded, the quanƟty supplied, and the magnitude of the
pc = 32
40 pe surplus if a price floor of $50 is imposed in this market.
20 c. Determine the quanƟty demanded, the quanƟty supplied, and the magnitude of the
shortage if a price ceiling of $32 is imposed in this market. Also, determine the full
12
10 20 30 economic price paid by consumers.
28

2. Suppose demand and supply are given by Qd = 14 – 0.5 P and Qs = 0.25P – 1.


a. Determine the equilibrium price and quanƟty. Show the equilibrium graphically.
b. Suppose a $12 excise tax is imposed on the good. Determine the new equilibrium price
and quanƟty.
c. How much tax revenue does the government earn with the $12 tax?

3. Use the accompanying graph to answer the quesƟons that follow.


a. Suppose this monopolist is unregulated.
(1) What price will the firm charge to maximize its profits?
(2) What is the level of consumer surplus at this price?
b. Suppose the firm’s price is regulated at $80.
(1) What is the firm’s marginal revenue if it produces 7 units?
(2) If the firm is able to cover its variable costs at the regulated price, how much output
will the firm produce in the short run to maximize its profits?
(3) In the long run, how much output will this firm produce if the price remains regulated
at $80?
4. The accompanying diagram depicts a monopolist whose price is regulated at $10 per
unit. Use this figure to answer the quesƟons that follow.

a. What price will an unregulated monopoly charge?


b. What quanƟty will an unregulated monopoly produce?
c. How many units will a monopoly produce when the regulated price is $10 per unit?
d. Determine the quanƟty demanded and the amount produced at the regulated price
of $10 per unit. Is there a shortage or a surplus?
e. Determine the deadweight loss to society (if any) when the regulated price is $10 per
unit.
f. Determine the regulated price that maximizes social welfare. Is there a shortage or a
surplus at this price?

5. Acme Water is a privately-owned company that is the sole supplier of water to a


rural town in Valencia. The owner of the firm has provided the manager of the
company an incenƟve to maximize the firm's profits, and the manager is currently
selling 100,000 liters of water per week at a price of €.05 per gallon. The marginal
cost of water is zero, but the firm's average cost of this level of output is €.01 per
liter.
a) Determine Acme Water's profits.
b) Now suppose that the local government imposes a price ceiling on water at a
price of $.01 per gallon. Will the firm earn economic profits of zero as a result of
this price ceiling? Explain.
c) Does the price ceiling of $.01 per gallon result in a shortage of water in Acme's
service area?

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