a) Suppose demand and supply for a good are respectively described by the following equations, where...
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a) Suppose demand and supply for a good are respectively described by the following equations, where P denotes the price in £: Qd = -5P+80 Qs = 20P-70. Find the equilibrium price and quantity for this good. [5 marks] b) Compute the price elasticity of demand for the case where the price rises from £3 to £5. Interpret your result. [5 marks] c) Suppose that the government introduces a tax of £3 per unit of the good. Compute the gross price paid by consumers, the net price received by producers and the new equilibrium quantity of the good. [10 marks] d) What is the total revenue generated by this tax? Compute the consumer tax burden and the producer tax burden. How should the price elasticities of demand and/or supply change to distribute the tax burden more evenly between consumers and producers? Explain your answer. e) Now assume that in the market there are only two firms, firm A and firm B. They form a cartel and each of them can decide whether to stick to the collusive agreement or cheat (e-g. produce more than the agreed quota). The payoff matrix is as follows, where the first number in each cell represents the profits of firm A (in millions of £) and the second number the profits of firm B: Collude Firm B Collude Cheat 13,13 5,17 Firm A Cheat 17,5 10,10 What outcome maximises joint profits? Will this outcome emerge in equilibrium if the two firms interact only once? Explain your answer. a) Suppose demand and supply for a good are respectively described by the following equations, where P denotes the price in £: Qd = -5P+80 Qs = 20P-70. Find the equilibrium price and quantity for this good. [5 marks] b) Compute the price elasticity of demand for the case where the price rises from £3 to £5. Interpret your result. [5 marks] c) Suppose that the government introduces a tax of £3 per unit of the good. Compute the gross price paid by consumers, the net price received by producers and the new equilibrium quantity of the good. [10 marks] d) What is the total revenue generated by this tax? Compute the consumer tax burden and the producer tax burden. How should the price elasticities of demand and/or supply change to distribute the tax burden more evenly between consumers and producers? Explain your answer. e) Now assume that in the market there are only two firms, firm A and firm B. They form a cartel and each of them can decide whether to stick to the collusive agreement or cheat (e-g. produce more than the agreed quota). The payoff matrix is as follows, where the first number in each cell represents the profits of firm A (in millions of £) and the second number the profits of firm B: Collude Firm B Collude Cheat 13,13 5,17 Firm A Cheat 17,5 10,10 What outcome maximises joint profits? Will this outcome emerge in equilibrium if the two firms interact only once? Explain your answer.
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a To find the equilibrium price and quantity we set the quantity demanded equal to the quantity supplied 5P 80 20P 70 25P 150 P 6 Substituting the equilibrium price P 6 into either the demand or suppl... View the full answer
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