ECON 1900 ANSWERS Assignment #1 Due Thurs. Feb7, 2013 ( /28)
1. The market for Widgets is illustrated in the diagram below. (16 marks)
Price ($/unit) A) Label the equilibrium quantity and pric0 (Q
and P0) on the diagram.
100 At this equilibrium, what is the total revenue
received by producers? ____$40(600) = $24000
B) If the government would like to support the
revenue of producers by introducing a price
60 S floor of $50 per unit and purchase the surplus at
PF this price floor.
What is the resulting quantity demanded by
20 What is the resulting quantity supplied by
producers ___800 units _____________.
0 200 400 QD600 800 1000 What quantity will the government have to
Q 0 Q S purchase___300 units ______________.
What is the resulting consumers’ expenditure on widgets ____$50(500) = $25000_________
What is the resulting producer revenue from their total widget production__$50(800) = $40000___.
What is the government’s expenditure on widgets? ______$50(300) = $15000____ .
C) Now suppose that the government wishes to
increase the total production and consumption Price ($/unit)
of widgets to 800 units, what size per unit
subsidy is necessary to increase the equilibrium00
quantity to 800 units?
_$30 per unit_______ Illustrate the effect of the
subsidy on the graph to the right. Note that you
could have shifted the demand curve up by $30 P P
instead. What is the government’s expenditure on
the subsidy? __$30(800) = $24000________What
S net of
is the resulting Price paid by consumers?___$20__P 20 subsidy
With the subsidy, what price do the producers D
receive per unit? __$50______ 0 200 800 1000
400 Q00 Q
1 D) Now suppose that the government would like to increase the producers’ revenue as compared to
part A) by using a quota system. The quota system
defines a maximum quantity that each firm is allowed to Price ($/unit)
supply so that the total quantity supplied to the market 100
does not exceed at 500 units. As a result of the quota S
system the supply curve changes to the following as
illustrated in the diagram to the right. What is the 80
resulting equilibrium price? 60
______$50________ What is the total revenue of
producers? ____$50(500) = $25000__________ What is 40
the consumers total expenditure? ____$50(500) = $25000_
2. Country A produces only two goods, X and Y.