Week 3
1.
The Economic Basis for Government Activity
Supposes the marginal social cost for television sets is $100. This is constant and equal
to the average cost of television sets. The annual demand for television sets is given by
the following equation: Q = 200,000 – 500P, where Q is the quantity sold per year and P
is the price of television sets.
a). If television sets are sold in a perfectly competitive market, calculate the annual
number sold. What are the CS and PS? Is the market efficient?
Q* = 150,000
CS = 22,500,000
PS = 0
At Q* = 150k, MSC = MSB thus it is efficient.
b). Show the losses in well-being each year that would result from a law limiting sales of
television sets to 100,000 per year. Show the effect on price, marginal social benefit, and
marginal social cost of television sets. Show the net loss in well-being that will result
from a complete ban on the sales of television sets.
P = $200
DWL = 2,500,000 (it is the area between the demand and supply curve from 100k to
150k units)
MSB at Q = 100k is $200
MSC = $100
The net loss in well-being when there is a complete ban on the sale is the CS area which
equal to $22,500,000.
c). Suppose instead of a law that limits the sales of television sets, there is a price floor of
$200. Will the market outcome be similar to that of part b)?
Yes. We will get the same Q and DWL.
Econ 290 Week 3 Tutorial
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2.
Consider the market for cigarettes. Suppose the market demand and supply curves are as
given below. In each case, quantity refers to millions of packs of cigarettes per month;
price is the price per pack (dollars).
Demand: P = 100 – 2Qd
Supply:
P = 10 + QS
a) Plot the demand and supply curves on a supply/demand diagram.
I believe you can do it 
b) Compute the equilibrium price and quantity.
P* = $40 and Q* = 30
c) Now suppose the government imposes a tax of 15 dollars per pack. Show how does it
affect the market equilibrium. What is the new “consumer price” and what is the new
“producer price”? Show them on your diagram.
Supply function with tax is P = 25 + Q
Pc = $50 and Pp = $35, Qt = 25
d) Compute the total revenue raised by the cigarette tax. What share is “paid” by
producers? What share is “paid” by consumer?
Total tax revenue = $375
Tax paid by consumers = $250
Tax paid by producers = $125
e) What is the CS, PS and DWL associated with the tax?
CS = $625
PS = $312.5
DWL = $37.5
Econ 290 Week 3 Tutorial
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3.
Suppose that the following represents the labour for Toronto. Graph the following
information for the market.
Wages (In dollars per hour)
15
11
7
3
Quantity Demanded
3800
4200
4600
5000
Quantity Supplied
5000
4800
4600
4400
a) What is the equilibrium employment and wage in the Toronto labour market?
L* = 4600 and W* = $7
b) Suppose that the government places $11 price control on the market, what kind of
price control is this? (Please name it)
Minimum wage
c) If this $11 wage control is imposed, show this on your graph. What is the new quantity
supplied and quantity demanded in the market? How many jobs are destroyed by this
policy.
Ls = 4800 and Ld = 4200
Number of job destroyed = 4600 – 4200 = 400
d) Discuss what would be a rational for such intervention. Who gains from this policy
and who loses?
The government want to help the poor.
Gainer: who still get employed
Loser: employers and those who lose their jobs
Econ 290 Week 3 Tutorial
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