Reference no: EM131519302

Assignment:

• You may work with your fellow students on it, but I recommend being sure you can complete it on your own. I also recommend not letting anyone else free ride off of your work.

• Do not resort to looking up answers at first. Think your way through each part and answer it as best you can before consulting a resource.

• Please do not print this document and write your answers into the remaining narrow spaces. Use a fresh page.

• When the assignment calls for an explanation, your response should be offered in three sentences or fewer and in your own words. If you understand the concepts, meeting these criteria will not be a problem.

• I mentioned in lecture that my assignments will generally be more difficult than exam questions. I wrote these problems and questions to challenge you; they are not designed to discourage, so do not let them.

• In that vein, do not worry if you do not answer every question perfectly before submitting. I am looking for a good effort on your part.

• I am quite happy to offer clarification or guidance if requested.

1. Problem

The market for vinyl records has supply and demand curves given below.

qS = 50p - 100qD = -75p + 300

The government decides to impose a price floor of $4 on vinyl, because no one should have to pay high prices for vinyl.

Find the consumer and producer surplus and the deadweight loss.

This is a bit of a large problem ("large" does not necessarily mean difficult, though!).

Here are some pointers.

• Find p* and q*.

• Find the price associated with qs (or, plug in qs and solve for p using the supply equation).

• Draw a picture; this will help you identify the values you will need to calculate to find the areas determining consumer surplus, consumer surplus, and deadweight loss.

• Make use of geometry; you can partition large areas into two smaller areas.

• Sometimes you will use a p to find a q, and sometimes you will use a q to find a p.

• Write your work out neatly. A good idea would be to title each set of calculations, as well.

• When doing calculations, be sure you know what values you are looking for and why you need that value.

2. Interpretation

Explain what effect the price floor has on the market (the consumers and producers) and how this differs from the case there were no price floor. Use plain English, as if you were speaking with someone who knew little about economics.

There is no "word floor" here. As long as your explanation gets the idea across, it is sufficient.