Directions:
Please follow all directions provided in Illinois Compass 2G for submission of this assignment.
This is a team assignment, so you must work with your assigned team to create one Word or PDF file in response to the questions in the attached document. One member of each team will submit your MS Word or PDF document for the whole team. No other formats will be accepted.
As with all other assignments, please utilize well-executed, clearly constructed graphs where requested. Please remember to:
- Label all axes (P, Q)
- Label all lines/curves (Demand, Supply)
- Label all relevant equilibrium points
- Label intercepts for your linear demand and supply. (Intercepts are the points where the lines intersect the axes. For example, if a demand curve intersects the price axis at P=100, indicating that at P=100, 0 units are demanded, you should label that point on the axis with the price of 100).
- Please limit your depictions of supply and demand only to the non-negative values of P and Q (e.g., utilize only Quadrant 1 of the coordinate plane)
This assignment consists of 4 (four) questions. Please make sure that you complete all of them. We suggest that you utilize this Microsoft Word template for completing this assignment.
Question 1 (10 points)
The city of Chambana has a large number of video poker arcades. The demand by patrons for the games (in thousands per week) is Qd = 300 – 3P and the supply is Qs = 3P where P is the price in cents charged to play a game.
- What is the equilibrium number (quantity) of games played?
- What is the equilibrium price?
- Draw a diagram depicting the equilibrium in this market.
Question 2 (15 points)
Continue your analysis of the video poker market in Chambana: demand by patrons for the games (in thousands per week) is Qd = 300 – 3P and the supply is Qs = 3P.
Now suppose that the city of Chambana passes a new law which requires that all video poker arcades contribute m cents to a city charitable fund for each game played on their machines.
- In a diagram, show the effect of the new law on the market and explain. (Do not try to give an algebraic solution; just show what happens graphically and describe.)
- Graphically indicate the incidence of taxation on consumers as well as arcade owners (producers). Explain what incidence of taxation is and what your graph tells you about the incidence of taxation in this case.
Question 3 (10 points)
Suppose there is a small island nation with no international trade but capable of growing many types of vegetables. Consider the market for tomatoes on this island (and for our purposes, suppose the currency on this island nation is called dollars, a very original name).
Assume the demand for tomatoes of Qd = 600 – 100P while supply is described by Qs = 50P.
- Calculate the equilibrium price and quantity in the market for tomatoes.
- Graphically depict this outcome.
Question 4 (15 points)
Suppose the government of the island has decided to give consumers a more attractive price for tomatoes by imposing a fixed, per unit subsidy.
Thus, start with the original demand (Qd = 600 – 100P) and supply (Qs = 50P) and analyze this new intervention, the subsidy. The subsidy works like this: each tomato seller receives a 3-dollar refund for each tomato sold.
- Write down the equation for the new “effective supply” curve.
- Determine the new equilibrium quantity and equilibrium price.
- What is the price that the consumers will pay for their tomatoes? What is the price that the producers will effectively earn for their tomatoes, inclusive of the subsidy?
- Graphically depict the new equilibrium complete with (solved) values for the new price and quantity. (Label the original supply as S1 and the new “effective supply” as S2).
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