ECON 401
Fall 2013
Homework Set #2
This assignment is due at the beginning of class on Tuesday, October 22.
1. Suppose that the market demand and supply curves in a local market for pizza
are represented by the following equations:
𝑄 𝐷 = 111 − 10𝑃
𝑄 𝑆 = −39 + 5𝑃
where 𝑄 𝐷 is the quantity demanded of pizza (in thousands), 𝑄 𝑆 is the quantity
supplied, and P is the price of pizza (in dollars per pizza). Suppose a tax of $1.20
per pizza is imposed on pizza sellers.
a) How does the tax affect the quantity of pizza sold, the price that buyers pay
for pizza, and the price that sellers receive? Show your work for answering
these questions and provide a graphical representation of the solutions.
b) How does the tax affect consumer surplus and producer surplus?
c) What is the amount of the deadweight loss resulting from the tax? Explain.
2. Answer a) and b).
a) What is meant by tax incidence?
b) How does elasticity impact the determination of tax incidence. Discuss.
3. What is meant by the Marginal Rate of Substitution (MRS)? How is it related to
the Indifference curve and to Marginal Utility?
Points: Q1 =6 points; Q2=2 points; Q3=2. TOTAL=10 points