Problem Set 2
Microeconomic Analysis & Applications – (ECON 208)
Week October 3 - October 7
1 Supply elasticity
We have been paying a lot of attention to the elasticity of demand. But it is important not to
forget about the supply side - it is just as important as demand. The following table shows the
relationship between price and quantity supplied for widgets:
Table 1: Supply schedule for widgets
Point Price Quantity Supplied
A $2 65
B $3 85
C $4 100
D $5 112
E $6 122
F $7 130
G $8 136
H $9 140
1. Plot the supply curve for widgets on a scale diagram.
2. Compute the price elasticity of supply between points A and B, B and C, C and D, and
3. Provide a general explanation for the determinants of supply elasticity.
4. How do you expect the supply elasticity for a given product to be diﬀerent in the short
run compared to the long run?
1 2 The algebra of tax incidence (I will solve this exercise or a
very similar one in class)
This exercise will help you work through the issue of tax incidence. (See Extensions in Theory
4-1 on page 90 if you get stuck!)
Consider the market for gasoline. Suppose the market demand and supply curves are as
given below. In each case, quantity refers to millions of litres of gasoline per month; price is the
price per litre (in cents).
p = 80 − 5Q D (1)
p = 24 + 2Q (2)
1. Plot the demand and supply curve on a scale diagram.
2. Compute the equilibrium price and quantity.
3. Now suppose the government imposes a tax of 14 cents per litre (notice that the price is
in cents per litre, so just use t=14). Show how this aﬀects the market equilibrium. What
is the new ’consumer price’ and what is the new ’producer price’?
4. Compute the total revenue raised by the gasoline tax. What shar