25 December 2020

Due date: 17:00 4 January 2021 (I WILL NOT ACCEPT ANY HOMEWORK AFTER
THIS TIME)
Total points: 15
ECN 201E Intermediate Microeconomics Homework 2
Make sure to submit the homework by the due date. I will not accept any homework after this
time and date.
Answer the 3 questions below. Make sure to show all your working and calculations for
significant partial credit. Good luck!
Please write your name and ITU ID number on your answer sheet.
Question 1
𝑑 𝑙𝑛 𝑄
Prove that the price elasticity of demand for a good can also be expressed as where 𝑄 is
𝑑 ln 𝑃
quantity demanded of the good and 𝑃 is its price. [5 points]
Question 2
2a) What is the Laffer curve? [1 point]
2b) Why would you expect the tax revenue to be 0 when the tax rate was equal to 0 and when
also when the tax rate was equal to 1? [2 points]
2b) Suppose that the market demand curve for labour is flat at some wage 𝑤
̅. Suppose the supply
curve of labour 𝑆(𝑤) has a conventional upward slope. The equilibrium labour supplied is 𝐿′
in this situation as shown below.

Now suppose the government levies a tax on labour at the rate 𝑡. This means if the firm pays
𝑤
̅, the worker only gets 𝑤 = (1 − 𝑡)𝑤
̅. On your answer sheet, redraw the above figure. In
 the same figure, draw the new labour supply curve after the tax on labour has been imposed
and show the new equilibrium labour supplied 𝐿∗ after the tax in comparison to the old
equilibrium 𝐿′. [3 points]
Question 3
1
Let 𝐷(𝑝) = 𝑝 and 𝑆(𝑝) = 𝑝 where 𝑝 is the market price be the market demand function and
market supply function respectively.
(a) Find the equilibrium price 𝑝∗ and equilibrium quantity 𝑄 ∗ of the market. [2 points]

(b) At the equilibrium price 𝑝∗ , is the price elasticity of demand 𝜖𝑑 larger, smaller or equal in
magnitude to the price elasticity of supply 𝜖𝑠 ? [3 points]
𝑝
[Note: The price elasticity of supply is defined as 𝜖𝑠 = . 𝑆 ′ (𝑝)]
𝑆(𝑝)