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Additional HL Paper 3 Exercises Section 1


1.

Given the demand function Qd = 100 2P and the supply function Qs = -50 + 4P:
a) Plot the functions on the grid below and label them. You may first like to calculate the
ordered pairs using a table of values as indicated below.
Price

Qd = 100 2P Qs = -50 + 4P

b) Using algebra, find the equilibrium price and quantity implied by the intersection of the two
functions. Check that it agrees with what is suggested by your graph from part a.

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c) Using geometry (and remembering that the area of a triangle is calculated according to the
formula A = b * h) calculate the consumer and producer surplus enjoyed at this equilibrium
point.

d) Using algebra, calculate the quantity demanded and the quantity supplied at a price of $20.
Would there be excess demand or excess supply at this price and of how many units?

e) Just by looking at the functions expressed algebraically, how can you tell how many units
people would want to buy at a price of zero? How can you tell at which price sellers will begin to
bring the good to market?

f) If buyers suddenly began buying many more additional units every time the price dropped by
$1, how would you expect the demand function to change? Conversely, if sellers suddenly
began supplying many more additional units every time the price rose by $1, how would you
expect the supply function to change? Explain your answers.

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2.

Given the same linear demand and supply functions as were used in question 1:
a) Apply a $5 per unit specific indirect tax to the good and plot the resultant supply and demand
curves on the grid below:

b) Looking at the diagram, what has been the impact of the tax on the equilibrium market price
and quantity sold as compared to the situation without the tax looked at in question 1? Estimate
the new equilibrium price and quantity to the nearest whole unit.

c) Calculate the consumer and producer surplus associated with this new post-tax equilibrium
point as well as the revenue gained by the government through the imposition of the tax.
Comparing the sum of these three amounts to the sum of the consumer and producer surplus
associated with the equilibrium point in question 1 c above, which is greater? What then has
been the impact of the tax on overall welfare?

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d) Calculate and compare consumer expenditure and producer revenue before the tax was
applied to consumer expenditure and producer revenue after the tax was applied. What was the
impact of the tax on each?

e) Comparing the initial equilibrium price from Q1 with the post-tax equilibrium price from part
b above, how much of the $5 tax has been borne by consumers? What portion therefore has
been borne by producers? Explain why the incidence of the tax is different for consumers and
producers (or, in other words, why the burden of the tax has been borne unevenly).

3.

Given the same linear demand and supply functions as were used in question 1:
a) Apply a $5 per unit specific indirect subsidy to the good and plot the resultant supply and
demand curves on the grid below:

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b) Looking at the diagram, what has been the impact of the subsidy on the equilibrium market
price and quantity sold as compared to the initial situation looked at in question 1?

c) Calculate the consumer and producer surplus associated with this new post-subsidy
equilibrium point as well as the money spent by the government to pay for the subsidy.
Compare the sum of the consumer and producer surplus to the total welfare associated with the
equilibrium point in question 1 c. What has been the impact of the subsidy on overall welfare?

d) After making the necessary calculations, compare consumer expenditures and producer
revenues before the subsidy was applied to consumer expenditures and producer revenues
after the subsidy was applied. What is the impact of the subsidy on each?

e) Comparing the initial equilibrium price from Q1 with the post-subsidy equilibrium price from
part b above, how much of the $5 subsidy has been transferred to consumers? What portion
therefore has been transferred to producers? Explain why the incidence of the subsidy is
different for consumers and producers (or, in other words, why the benefits of the subsidy have
been distributed unevenly).

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4.

Given the demand function Qd = 200 30P and the supply function Qs = -50 + 20P:
a) Plot the functions on the grid below and label them. You may like to first calculate the
ordered pairs using a table of values as indicated below.
Price

Qd = 200 30P

Qs = -50 + 20P

b) Using algebra, find the equilibrium price and quantity implied by the intersection of the two
functions. Check that it agrees with what is suggested by your graph from part a.

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c) Using geometry (and remembering that the area of a triangle is calculated according to the
formula A = b * h) calculate the consumer and producer surplus enjoyed at this equilibrium
point.

d) If the government were to impose a floor price of $6, would there be a shortage or surplus in
response and of how many units?

e) Compare producer revenue and consumer expenditure in this situation (the $6 price floor)
with producer revenue and consumer expenditure in the initial situation without the price floor.
Consider only the units that are actually sold by producers to consumers.

f) If the government were to commit to buying the surplus production at the price they have
mandated, how much would they have to spend?

g) If instead the government were to impose a price ceiling of $4, would there be a shortage or a
surplus in response and of how many units?

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h) Compare the producer revenue and consumer expenditure in this situation (the $4 price
ceiling) with the producer revenue and consumer expenditure in the initial situation without the
price ceiling. Consider only the units that are actually sold by producers to consumers.

i) Calculate the consumer and producer surplus enjoyed under the $4 price ceiling and compare
it to the consumer and producer surplus enjoyed in the initial situation set out in part c. Has
the price ceiling transferred some surplus from producers to consumers and if so, how much?
Has some welfare simply been lost? If so, explain your answer and calculate the extent of the
welfare loss. You may wish to use the grid below to draw the demand and supply functions and
the price ceiling to help you answer the question.