1. Consider the following demand and supply curves for the automobile industry:

Q _D = 200P ^-1.2

Q _s = 1.3P,

where P is measured in thousands of dollars and Q in millions of automobiles.

(a) Find the equilibrium price and quantity.

(b) Suppose now that government policy restricts automobile sales to 11 (million) in order to control emissions of pollutants. An approximation to the direct welfare loss from such a policy is $2.4 billion. How does the size of the total welfare loss from a quantity restriction depend on the elasticities of supply and demand? What determines how the loss will be shared?

Answer rating: 100% (QA)

a At equilibrium Q d Q s 200P12 13P 200 13P22 P 20013122 986575 P 986575 Q 13P 1398... View the full answer