1. Suppose that the demand curve for oranges is given by the equation Qd = 1000 – 250P with the quantity measured in oranges per day and price measured in dollars per orange. The supply curve is given by Qs = 200P.
a. Solve for the equilibrium price and quantity of oranges. Show the supply and demand curves on a graph. Clearly identify on the graph the equilibrium price and quantity.
b. Suppose that an excise tax of 50 cents apiece is imposed on oranges. What are the equations for the new supply and demand curves? What is the new equilibrium price and quantity of oranges? What is the new posttax price from the supplier’s point of view? Illustrate your answer by drawing supply and demand curves.
c. Now, repeat this exercise from part b above, using a 50 cent sales tax instead of the 50 cent excise tax. Answer all the questions from part b again. You should draw an entirely new supply and demand diagram for this question.
d. Suppose that an excise tax of 20 cents apiece and a sales tax of 30 cents apiece are simultaneously imposed. Answer all of the questions from part b again and illustrate this answer on an entirely new supply and demand diagram.
2. Upper Slobbovians smoke 20 million cigarettes per year; so do Lower Slobbovians. To discourage smoking, each country imposes an excise tax of 75 cents per pack. As a result, the price of cigarettes rises by 55 cents per pack in Upper Slobbovia, but only by 35 cents per pack in Lower Slobbovia. True or False: The Upper Slobbovian excise tax discourages smoking more effectively (that is, it leads to a bigger decrease in smoking) than the Lower Slobbovian excise tax? Answer on the assumption that the supply curves for cigarettes are identical in both countries. Justify your answer with graphs completely labeled and making use of the very specific information (numbers) above.
3. Using the arc elasticity formula, calculate elasticity of demand for each of the following changes in demand by a household. Report whether the demand for each good is elastic or inelastic.

P_{1} 
P_{2} 
Q_{1} 
Q_{2} 
Long distance phone service 
$0.25 per minute 
$0.15 per minute 
300 minutes per month 
400 minutes per month 
Orange juice 
$1.49 per quart 
$1.89 per quart 
14 qts 
12 qts 
Hamburgers 
$2.89 
$1.00 
3 per week 
6 per week 
Cooked shrimp 
$9.00 per lb 
$12.00 per lb. 
2 lbs per month 
1.5 lbs per month 
4. Suppose that the current market price for DVRs is $200 (P_{1}) and average consumer income (Y_{1}) is $50,000. Under these conditions, 7.5 million DVRs will be sold this year (Q_{1}). Econometricians have estimated that the elasticity of demand for DVRs is 2.65 and the income elasticity for DVRs is 3.5. Use this information to predict the annual number of DVRs (Q_{2}) sold under the following conditions:
a. Increasing competition from Korea causes DVR prices to fall to $185 with income remaining unchanged.
b. Income tax reductions raise average income to $52,000 with the price of DVRs remaining unchanged.
c. Both of the events above occur simultaneously.
5. Fill in the missing amounts (blanks):

% Change in Price 
% Change in Qd 
Elasticity 
Demand for Ben & Jerry’s Ice Cream 
+15% 
27% 

Demand for beer at Seahawks football games 
10% 

1.5 
Demand for Broadway theater tickets 

30% 
2.5 
Supply of chickens 
+20% 

+0.67 
Supply of beef cattle 
10% 
13% 

Subject  Business 
Due By (Pacific Time)  10/12/2014 11:00 pm 
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