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ECON201 –003, Assignment #3

Market Intervention

Due Date: February 05, 2013 @ 13.00

1

Question 1: Market for lobster – Revisited (52 points)

Consider again the market for Atlantic lobster presented in Q#1 of the previous

assignment where the annual demand and supply for lobster is given by the

following equations: 100 0.2

D

P Q= − , and 25 0.1

S

P Q= + , where P is the price per kg

in dollars, Q

D

and Q

S

are respectively the quantity demanded and the quantity

supplied (in thousand of Kgs). The government imposes a quota of 150 thousand

of kgs per year in the lobster industry and licenses are issued to allocate the rights

to harvest lobster.

1. Reconstruct the Demand and Supply curves in a graphing paper and show

graphically the equilibrium price P* and quantity Q* for lobster in the

absence of quota (8 points).

2. Denote the quota by Q and show it graphically. Calculate the demand price

and the supply price under this quota and show them graphically (7 points).

3. Calculate the quota wedge (the quota rent) per Kg of lobster when 150

thousand of Kgs are sold? (7 points)

Another way to achieve the same reduction of the harvested lobster at 150

thousand of kgs per year is by imposing an excise tax. Consider now that the

government imposes an excise tax that is officially paid by the fishing industry.

4. Find the excise tax rate (in dollars) and fully explain how does the tax work

(i.e. which side of the market will it affect and how) by illustrating your

answers graphically (8 points)

5. Calculate the tax revenue collected by the government in this scenario and

show it in the graph (7 points).

ECON 201 –003, Assignment #3

Market Intervention

Due Date: February 05, 2013 @ 13.00

2

6. Calculate the incidence of the tax (i.e. the portion paid by each party per

kg), show it graphically and identify which party (consumers/producers)

pays the heavier tax burden. Illustrate graphically (10 points)

7. Comment briefly on positive effects (if any) of these policies (5 points)

Question 2: Effect of Taxes (48 points)

In each following cases (16 points) involving taxes, calculate and explain:

1) Whether the incidence of the tax fall more heavily on consumers or

producers (4 points).

2) Why the government revenue raised from the tax (calculate it) is not a good

indicator of the tax (4 points).

3) What missed opportunity or inefficiency arises (3 points).

4) Illustrate your answers with a simple graph (5 points).

a. The government imposes an excise tax on the sale of all college textbooks.

Before the tax was imposed 1 million textbooks were sold every year at price

of $50. After the tax is imposed 600, 000 books are sold yearly; students pay

$55 per book, while publishers receive $30 per book.

b. The government imposes an excise tax on the sale of all airplane ticket.

Before the tax was imposed, 3 million airline tickets were sold every year at

a price of $500. After the tax is imposed 1.5 million tickets are sold every

year; travelers pay $550 per ticket, while airlines receive $450 per ticket.

c. The government imposes an excise tax on the sale of all toothbrushes.

Before the tax 2 million toothbrushes were sold yearly at a price of $2.00.

After the tax is imposed, 800,000 toothbrushes are sold yearly; consumers

pay $2.50 per toothbrush, while producers receive $ .75 per toothbrush.