Kelvin Maduka Obiora 04782025

Hawa Musa Opata 07742025

Charles Odei Asare 01982025

Charlton Mandaza 25672025

Leeroy Takudzwa Magora 92362025

In class Group Questions

Principles of Economics

October 28, 2024

Dr. Stephen Armah

VIDEO 5

1. Lovers of classical music persuade Congress to impose a price of $40 per ticket. Does

this policy get more or fewer people to attend classical music concerts?

Solution

If the price ceiling is lower than the equilibrium, it will have an effect on the market.

2. The government has decided that the free-market price of cheese is too low.

A. Suppose the government imposes a binding price floor in the cheese market. Use a

supply-and-demand diagram to show the effect of this policy on the price of

cheese and the quantity of cheese sold. Is there a shortage or surplus of cheese?
B. b. Farmers complain that the price floor has reduced their total revenue. Is this

possible? Explain

It could be just if the demand is elastic, otherwise it should be better for them.

Initial revenue = p1 x Q1

New revenue = pmin x QD

C. In response to farmers' complaints, the government agrees to purchase all of the

surplus cheese at the price floor. Compared to the basic price floor, who benefits

from this new policy? Who loses?

Initial revenue = p1 x Q1

New Revenue = (pmin x QP) + (Qs - QD)pmin

New Revenue = pminQD + QSpmin - QDpmin

New Revenue = Qspmin

2. A recent study found that the demand and supply schedules for Frisbees are as

follows:

Price Per Frisbee Quantity demanded Quantity Supplied

$11 1 million 15 million

10 2 12

9 4 9

8 6 6

7 8 3

6 10 1

a. What are the equilibrium price and quantity of

Frisbees?

b. Frisbee manufacturers persuade the government that Frisbee production

improves scientists' understanding of aerodynamics and thus is important

for national security. A concerned Congress votes to impose a price floor $2 above

the equilibrium process. What is the new market price? How many

Frisbees are sold?

 Now the price is $10. They are sold just 2 million.

c. Irate College students march on Washington and demand a reduction in the

price of Frisbees. An even more concerned Congress votes to repeal the

price floor and impose a price ceiling $1 below the former price floor. What is the

new market price? How many Frisbees are sold?

Now the price is $7. They sold 3 million. There is Shortage

4. Suppose the federal government requires beer drinkers to pay a $2 tax on each case of beer

purchased. (In fact, both the federal and state governments impose beer taxes of some sort.)

a. Draw a supply-and-demand diagram of the market for beer without the tax. Show the price

paid by consumers, the price received by producers, and the quantity of beer sold. What is the

difference between the price paid by consumers and the price received by producers?

B. Draw a supply-and-demand diagram of the market for beer with the tax. Show the price

paid by consumers, the price received by producers, and the quantity of beer sold. What is the

difference between the price paid by consumers and the price received by producers? Has the

quantity of beer sold increased or decreased?

 Equilibrium

p1: Price paid by Consumers.

p1: Price received by Producers.

Q1: Quantity ‘of beer sold.

Difference = 0

Tax

P3: Price paid by Consumers.

p2: Price received by Producers.

Q2: Quantity of beer sold.

Tax

p3-p2=$2

5. A senator Wants to raise tax revenue and make workers better off. A staff member proposes

raising the payroll tax paid by firms and using part of the extra revenue to

reduce the payroll tax paid by workers. Would this accomplish the senator's goal?

No, because as we see in previous exercises, tax is paid for the demand(firmas)and

supply(workers),

6. If the government places a $500 tax on luxury cars, will the price paid by consumers rise

by more than $500, less than $500, or exactly $500? Explain.

It would depend on the elasticity of demand:

1. Consumers have to pay less than $500 because it is divided with the suppliers.

2. Consumers have to pay completely the $500 if the elasticity of supply is

perfectly elastic
 VIDEO 4 - https://www.youtube.com/watch?v=xeL6r77fSJw

Question: Supply and Demand with Tax

Demand and Supply: Qd = 120 – 2P and QS = 3P – 30

Solution:

Equilibrium, no tax

Qd = QS

120 – 2P = 3P – 30

5P = 150

P = $30

Q = 120 – 2(30) = 60

Equilibrium with 10% sales tax

Qd = 120 – 2PB and QS = 3PS – 30

PB = (1+sales tax rate) PS

PB = (1+0.10) PS

PB = 1.10 PS

Qd = 120 – 2(1.10 PS)

Qd = QS

120 – 2.20 PS = 3PS – 30

5.20 PS = 150

PS = $28.85

PB = 1.10 PS = 1.10 (28.85) = $31.74

Q = 120 – 2(31.74) = 56.50

Video 1 Supply and Demand: Tax Problem with Table

Question 1: Table

Price ($) Quantity Demanded Quantity Supplied

9 10 90
8 20 80
7 30 70
6 40 60
5 50 50
4 60 40
3 70 30
Equilibrium Price (No Tax) = $50
Equilibrium Quantity (No Tax)= 50

When there is a $4 tax;

Price paid by buyers

Buyer’s effective price is $7

Quantity demanded is 30

Buyer’s price burden is $2

Price paid by sellers

Sellers effective price is $3

Quantity supplied is 30

Seller’s tax burden is $2

Tax Revenue= $4 x 30 = $120

Question 2: Table

Price ($) Quantity Demanded Quantity Supplied

8 30 150
7 40 130
6 50 110
5 60 90
4 70 70
3 80 50
2 90 30
Assuming there is a $3 per unit tax

Effective Price Paid by Buyers

Buyer’s effective price is $6

Quantity demanded is 50
Buyer’s price burden is $2

Effective price paid by sellers

Sellers effective price is $3

Quantity supplied is 50

Seller’s tax burden is $1

Tax Revenue = $3 x 50 = $150

Video 2: https://youtu.be/6UcdivsrgcM

Suppose the demand for burgers is given by Qd = 286 – 20p, and the supply is Qs = 88 + 40 p. If
the govt imposes a per unit tax of 1.05. What is the (a) New equilibrium price and (b) tax
revenue?
Question (a)
Before Tax
Demand = Supply
286 – 20p = 88 + 40p
286 – 88 = 40p + 20p
P = 3.3
Q = 286 – 20(3.3) = 220
Q = 220
With Tax
Inverse Demand Function
20p = 286 – Q
p = 14.3 – 0.05 Q
Inverse Supply Function
-88 + Q = 40p
p = -2.2 + 0.025Q
p = -2.2 + 0.025Q + 1.05
p = -1.15 + 0.025Q
After imposing the per unit tax, old demand = new supply
p = 14.3 – 0.05Q (old)
p = -1.15 + 0.025Q (new supply)
14.3 – 0.05Q = -1.15 + 0.025Q
14.3 + 1.15 = 0.025Q + 0.05Q
15.45 = 0.075Q
Q = 206
P = 14.3 – (0.05*206)
p=4
Question (b)
Tax Revenue = tax rate * Quantity new
Tax revenue = 1.05*206 = 1216.30
206 = 88 – 40p
P = 2.95
Government Revenue = 1.05*206 = 1216.30

Video 3 : https://www.youtube.com/watch?v=0xC_8f4HPuo-
Solving for market balance

Q^D=50-P,

Q^S=-10+0.5P,

Q^S=Q^D,

50-P=-10+0.5P,

60=1.5P,

P=60/1.5, and P=40.

Q=50-40=10 Q^S=-10+0.5(40)

Equilibrium price: $40

Equilibrium amount = 10

Tax I: on sellers: Q^D=50-P,

Q^S=-10+0.5P,

Q^D=50-P_B,

Q^S=-10+0.5P_S with tax.

Firms/sellers must pay a $6 per-unit tax: P_S=P_B-6,

Q^D=50-P_B,

Q^S=-10+0.5(P_B-6).

Q^S = -13 + 0.5 P_B

Q^D = Q^S 50 - P_B = -13 + 0.5 P_B 63 = 1.5 P_B

P_B=63/1.5

P_B=$42
P_S=$42-$6=$36

P_S=$36

P_B=36+$6=$42

Q^D=50-42=8

Q^S=-10+0.5(36)=8

Without tax: Price: $40.

With tax:

P_B=$42

Buyers pay $2 ($42-40) of the $6 tax.

P_S=$42+$6=$36

Firms pay $4 (40-36) of the $6 tax.

Buyers pay 1/3 of the total tax (2/6).

share of tax paid by sellers/firms

4/6=2/3