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Lecture 14

ECON 101 Lecture Notes - Lecture 14: Deadweight Loss, Economic Equilibrium, Inverse Demand Function


Department
Economics
Course Code
ECON 101
Professor
Ashok Kotwal
Lecture
14

Page:
of 4


  !"
#$ %&
#! %&
#' !&!!#!
 
()*!!#%%!

()+!!#%,%&,
+!!#%,%&,
() -!!#!..&&
,/&&,
()&%!&.0%
%!! !#1
2. Consider the grain market in India where no consumer buys less than 10 kgs of
grain per month. The government is considering three different schemes to
subsidize the poor consumers: Scheme A will make available any amount of grain
that a beneficiary wants to buy at half the market price; Scheme B will give 5 kgs
of grain at half the market price to each beneficiary; Scheme C will give cash
amount required to buy 5 kgs of grain at half the market price to each beneficiary.
The stipulation is that those not identified as ‘poor will have to buy at the
prevailing market price. Under which of these schemes will the market price be
the highest? Explain clearly the logic underlying your answer.
2 Explain with the supply and demand graphs how under certain conditions a
draught can make Coffee farmers in Brazil better off. Clearly state the conditions
under which such an outcome is possible. Also explain: if farmers get better off
by reducing the output, why doesn’t each farmer produce less?
" Suppose a technological advance reduces the cost of making computers.
a. Use a supply and demand diagram to show what happens to price, quantity,
consumer surplus and producer surplus in the market for computers.
b. Computers and adding machines are substitutes. Use a supply and demand
diagram to show what happens to price, quantity, consumer surplus and
producer surplus in the market for adding machines. Should adding machine
producers be happy about the technological advance in computers?
5. Parliament decides that Canada should reduce air pollution by reducing its use of
gasoline. It imposes a $0.50 tax for each litter of gasoline sold.
a. Should it impose this tax on producers or consumers? Explain carefully using
a supply and demand diagram.
b. If the demand for gasoline were more elastic, would this tax be more effective
or less effective in reducing the quantity of gasoline consumed? Explain with
both - words and a diagram.
3
 !  .    % & X 
#   '!
   . 
. % & X  p
4
2
q  !  .
#.p
4
3
5
q

+ !    6   6#
&    0
% & X  
 ! &   

   !   

7%&
X !!.
#.p 45
"q ( ! %  ! 6# % & X
! 
    % % !  
!  ( )  ) + !

6!%#
8!%
 $
! &    



&%&X 
&!,90
:
$ 8 !     &!     
 % ; $
!      &!
   # % !   "    
 % &!   % ! 8 '! &<# %
!;
.33: '!!
  ( !  ;) &  . !  
  '! # %   ;  
-!  ! . # %
 %& ! 8 
!;, 90

'!.%%pd 4
2qd 
!.#%
ps 435qs!


/% !   0   !  !
6 6#, -!  ! 6  
,

/%  # %        
&!!6
6#,
=!&., =!

#  ,

=  !  % ! # 1 !
% %  , -!
 
, ! #   &! ,
/% !&
90 &   &

90 ! !&     & % !
& /% ! >#
%  
    5. !  !  !
6# %
    6 % !
 # ( !  % 
#
)  #    %  &
!&
?
'!.% 8!qd 4p !
#.qs 4p

 !  .  ! # .  
 &!  ! 6  
 6 6# -!  ! 

,

$ 6# 0 % ;     .  !
 %  8!  !
 # . 
# &!  !  6  
# !
 !   . # 
!66# -!
 ! 
   ,

= ! 0 .  ! 0 , -!
%%!0#,
-!%
#,

 ! &!   # ! 0 
! !  & !
&!  
#&!

'!.%&&.#qd
4
pd!#.
&.#qs
4
2ps

-!!66#,

$ 0 % ;  &    
 -! 6 
!   #
 pd  !  . #  ps
! ! 0 
, -  ! 6 !
 ! # 6  ! &
!
0

. !  6 % !    ps 
pd -! ! ; 0 ! 
  # 
!6#%&.,

$  %    && !
!&!  % &
  !
 .   0 &  
  .
 # =   ;3 #
  ! & ! ; 0 
2