The Analysis of Competitive Markets

140) The utilities commission in a city is currently examining pay telephone service in the city. The
commission has been asked to evaluate a proposal by a city council member to place a $0.10
price ceiling on local pay phone service. The staff economist at the utilities commission
estimates the demand and supply curves for pay telephone service as follows:

QD = 1600 - 2400P QS = 200 + 3200P,

where P = price of a pay telephone call, and Q = number of pay telephone calls per month.

a. Determine the equilibrium price and quantity that will prevail without the price ceiling. b.
Analyze the quantity that will be available with the price ceiling (in the long-run). c.
The city council realizes that the telephone company could curtail pay phone service in
response to the ceiling. To prevent this, the council plans to impose a requirement that the
telephone company must maintain the current number of pay phones. In light of this
additional restriction, what will be the likely impact of the price ceiling?

141) In an unregulated, competitive market we could calculate consumer surplus if we knew the
equations representing supply and demand. For this problem assume that supply and
demand are as follows:

Supply P = 4 + 0.116Q Demand P = 25 - 0.10Q,

where P represents unit price in dollars and Q represents number of units sold each year.
Calculate the annual value of aggregate consumer surplus.

142) The elected officials in a west coast university town are concerned about the ʺexploitativeʺ
rents being charged to college students. The town council is contemplating the imposition of a
$350 per month rent ceiling on apartments in the city. An economist at the university
estimates the demand and supply curves as:

QD = 5600 - 8P QS = 500 + 4P,

where P = monthly rent, and Q = number of apartments available for rent. For purposes of
this analysis, apartments can be treated as identical.

a. Calculate the equilibrium price and quantity that would prevail without the price ceiling.
Calculate producer and consumer surplus at this equilibrium (sketch a diagram showing both).

b. What quantity will eventually be available if the rent ceiling is imposed? Calculate any
gains or losses in consumer and/or producer surplus.

c. Does the proposed rent ceiling result in net welfare gains? Would you advise the town
council to implement the policy?

143) In an unregulated competitive market, supply and demand have been estimated as follows:
Demand P = 25 0.10Q Supply P = 4 + 0.116Q,

where P represents unit price in dollars, and Q represents number of units sold per year.

a. Calculate annual aggregate consumer surplus.

b. Calculate annual aggregate producer surplus.

c. Define what producer surplus means.

144) In a competitive market, the following supply and demand equations are given:
Supply P = 5 + 0.36Q Demand P = 100 - 0.04Q,

where P represents price per unit in dollars, and Q represents rate of sales in units per year.

a. Determine the equilibrium price and sales rate.

b. Determine the deadweight loss that would result if the government were to impose a price
ceiling of 40 dollars per unit.

145) The demand and supply functions for basic cable TV in the local market are given as:
QD = 200,000 - 4,000P and QS = 20,000 + 2,000P.
Calculate the consumer and producersurplus in this market. If the government implements a price c
eiling of $15 on the price of
basic cable service, calculate the new levels of consumer and producer surplus. Are all
consumers better off? Are producers better off?

146) The demand and supply functions for oil on the world market are given as: QD = 25.64 - 0.06P
and QS = 21.74 + 0.07P. Calculate consumer surplus. If the Clinton Administration puts a
price ceiling of $20 per unit, calculate the resulting consumer surplus. Are consumers better off?

150) The market for semiskilled labor can be represented by the following supply and demand
curves: LD = 32000 - 4000W LS = 8000 + 6000W,

where L = millions of person hours per year, and W = the wage in dollars per hour.

a. Calculate the equilibrium price and quantity that would exist under a free market. What
impact does a minimum wage of $3.35 per hour have on the market?

b. The government is contemplating an increase in the minimum wage to $5.00 per hour.
Calculate the impact of the new minimum wage on the quantity of labor supplied and demanded.

c. Calculate producer surplus (laborersʹ surplus) before and after the proposed change.
Comment on the net effect of the proposed change upon workers as a whole and on individual
workers. How does this price floor differ from an agricultural support price?

d. Is the policy efficient from an economistʹs viewpoint?

151) Consider a competitive market with supply and demand curves expressed as:
Supply P = 5 + 0.036Q Demand P = 50 0.04Q,

where P represents unit price in dollars and Q represents sales rate in units per day.

a. Determine the equilibrium price and sales rate.

b. If this were the labor market for low skilled workers, what would be the loss in consumer
surplus (purchaser surplus) when the minimum wage is set at $40 per day (an eight hour day)?

c. What is the loss or gain in producer surplus (seller surplus) in part b. above?

152) The supply and demand curves for corn are as follows:

QD = 3,750 - 725P QS = 920 + 690P,

where Q = millions of bushels and P = price per bushel.

a. Calculate the equilibrium price and quantity that would prevail in the free market.
b. The government has imposed a $2.50 per bushel support price. How much corn will the
government be forced to purchase?

c. Calculate the loss in consumer surplus that would occur under the support program.

153) The market for all-leather menʹs shoes is served by both domestic (U.S.) and foreign (F)
producers. The domestic producers have been complaining that foreign producers are
dumping shoes onto the U.S. market. As a result, Congress is very close to enacting a policy
that would completely prohibit sales by foreign manufacturers of leather shoes in the U.S.
market. The demand curve and relevant supply curves for the leather shoe market are as follows:
QD = 50,000 - 500P

QUS = 6000 + 150P

QF = 2000 + 50P,

where Q = thousands of pairs of shoes per year, and P = price per pair.

a. Currently there are no restrictions covering all-leather menʹs shoes. What are the current
equilibrium values?

b. Calculate the price and quantity that would prevail if the proposed policy is enacted.

c. Sketch a diagram that analyzes the economic welfare implications of the proposed policy.

155) A country which does not tax cigarettes is considering the introduction of a $0.40 per pack tax.
The economic advisors to the country estimate the supply and demand curves for cigarettes as:
QD = 140,000 25,000P QS = 20,000 + 75,000P,

where Q = daily sales in packs of cigarettes, and P = price per pack. The country has hired you
to provide the following information regarding the cigarette market and the proposed tax.

a. What are the equilibrium values in the current environment with no tax?

b. What price and quantity would prevail after the imposition of the tax? What portion of
the tax would be borne by buyers and sellers respectively?

c. Calculate the deadweight loss from the tax. Could the tax be justified despite the
deadweight loss? What tax revenue will be generated?

156) The total and marginal cost functions for a typical soft coal producer are:
TC = 75,000 + 0.1Q2 and MC = 0.2Q

where Q is measured in railroad cars per year. The industry consists of 55 identical producers.
The market demand curve is: QD = 140,000 - 425P,

where P is the price per carload. The market can be regarded as competitive.

a. Calculate the short run equilibrium price and quantity in the market. Calculate the
quantity that each firm would produce. Calculate producer surplus, consumer surplus, and
total surplus at the equilibrium values. Calculate the firmʹs profit (or loss).

b. The Federal government is considering the imposition of a $15 per carload tax on soft coal.
Calculate the short-run equilibrium price and quantity that would exist under the tax. What
portion of the tax would be paid by producers and what portion by consumers? Calculate the
producer and consumer surplus under the tax and analyze the efficiency consequences of the
tax. Calculate the firmʹs profit (or loss) under the tax. Could the tax be justified despite its
efficiency implications?