ECO206 – Intermediate Microeconomics I

Section 2

Quiz #1 Summer 2021

NAME: ID:
Instructions
(i) Please copy below the Honor Pledge and place your digital signature underneath the
statement. Please note that no assessments will be accepted without this signed Pledge.

Honor Pledge:

Signature:

(ii) Please note that this is an individual assessment and hence you are expected to work on
your own without assistance or consultations with anyone. Heavy penalty would be imposed
for adoption of unfair means and copying answers.

(iii) Please show all workings.

Problem 1: The market for a certain kind of prescription drug is described by the following
supply and demand curves. Use them to solve problems 1-5.

Qd = 2500 −50P
Qs = −500 + 150P

1) Calculate the equilibrium price and quantity

2). Graph the supply and demand curves and show the equilibrium price and quantity.

3) Suppose that the government imposes a price floor of $18.

a. What is the quantity exchanged?
b. Is there a shortage or a surplus? How many units?

4) Suppose that the government imposes a $4 excise tax to be paid by buyers of the drug.
a. What is the equilibrium quantity of the drug traded after the tax is imposed?
b. What price is paid by buyers?
c. What is the net price paid by buyers (after the tax is paid)?
d. How much of the tax, in percentage terms, is paid by buyers and sellers?
e. What can you say about relative elasticity's of demand and supply based on your answers in
part d?
f. Calculate tax revenue collected by the government from this tax.
g. Calculate the deadweight loss of the tax.

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h. Draw a neat diagram and show initial equilibrium, after-tax equilibrium, tax revenue and
deadweight loss from tax.

5) Consider the market is in its initial equilibrium. Now suppose that the government imposes a
$4 excise tax to be paid by sellers of the drug (instead of the buyers). Would your answer to how
much of the tax, in percentage terms, is paid by buyers and sellers, change compared to question
4d? Why or Why not?

Problem 2: Suppose that the demand for beef depends on the price of beef PB, the price of lamb
PL, the price of rice PR and consumer income Y according to the function :

Currently, beef costs $16, lamb costs $12, rice costs $3 and income is 10.

a. Calculate the cross-price elasticity of demand for beef with the price of rice at the current
prices.
b. From the cross-price elasticity, are beef and rice substitutes or complements? Explain.
c. What is the income elasticity of demand for beef at the current situation?
d. From the income elasticity, is beef a normal good? Explain.

END OF THE TEST