Economics 207
Intermediate Microeconomics

Spring 2007

Dr. Léonie L. Stone

Homework 6

This homework is due at the beginning of class on Monday, April 16. No late homework will be accepted under any circumstances, so don’t ask. You homework must be legible, typed if possible, and stapled together. Illegible papers will not be graded, and if it’s not stapled and pages get lost, they will not count. In general, graphs should have everything on them appropriately labeled, and in economics, less is often more…a graph is worth a lot of words, and in general, explanations should be concise. SINCE THERE ARE MORE QUESTIONS THAN USUAL ON THIS HOMEWORK, IT WILL BE WORTH DOUBLE THE USUAL POINTS.

1. True/false/uncertain, explain… (as in the exams, credit is given for you explanation, not the T/F part. Answers with no explanations will receive zero credit)

a. In a perfectly competitive market in equilibrium, consumer surplus will be equal to producer surplus.

b. If the government able to remove all producer surplus from firms and give all the resulting revenues to consumers, social welfare would not change.

2. Suppose that by coincidence two markets for separate products had the same demand and supply functions. In each market, Qd50 – p, and Qs p. The government decides to discourage consumption in both markets. It institutes a $4 per unit tax in one market, and a quota (absolute supply restriction) of 23 units in the other market.

Are the welfare effects of these policies equal? Explain, using graphs to illustrate your answer. A good answer should show areas of consumer and producer surplus and deadweight loss in both cases.

3. As far as I can tell, at the University of Rochester, everyone complains about parking. One professor told me that to get a parking permit for a desirable lot, he would have to pay $700/year, but that even if he were willing to pay this amount of money, only a certain number of permits is available per year, and so he cannot buy one.

Assuming that parking at the U of R is a competitive market (which, of course, it isn’t), draw a graph showing the situation implied by the story above. To increase social welfare, all other things equal, would it be better for the U of R to raise parking fees, lower them, or leave them the same?

4. Consider a monopolist facing the following demand curve:

Q = 1000 – 2P

TC = 1000 + ½ Q2

MC = Q

a. Find the monopolist’s profit-maximizing price and quantity. Graph your results, and find consumer surplus, producer surplus, and deadweight loss (find these things numerically as well as graphically). Is producer surplus the same as profit in this case? Demonstrate and explain your answer.

b. If the government is interested in taxing this monopolist, from the point of view of social welfare, would it be better to use a lump-sum tax or a per unit tax? Explain, and support your answer with graphs. (It would probably be a good idea to look at the textbook discussion of this issue before answering this question.)

c. Now suppose that this is a long-run problem, and demand is the same but MC = ATC = 20. Find the profit-maximizing point, and graph your results. What is the size of the deadweight loss? What is the possible size of the deadweight loss if the monopolist lobbies the government to protect its monopoly?