Question 1. A. [25 points] Suppose the market for semiconductors in the U.S. is

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Question 1. A. [25 points] Suppose the market for semiconductors in the U.S. is characterized by: D = 200 – 40P [Demand] S = 40 + 40P [Supply] The market for semiconductors in the rest of the world is characterized by: D = 160 – 40P [Demand] S = 80 + 40P [Supply] Suppose the U.S. government imposes a quota of 32 units on its imports. Calculate the magnitude of the deadweight loss resulting from the quota under the assumption that the U.S. is a small open economy.

B. [25 points] Consider the following predation game involving an incumbent and a potential entrant. Payoffs are written with the potential entrant’s profits listed first and the incumbent’s listed second. The profit numbers represent discounted values over the life of the firms.

i) What is the equilibrium of this game?

ii) Would the equilibrium be different if the (-5, 0) payoff were instead (-5, 8)? Stays Out Enters Incumbent Predates Accommodates (0, 10) (-5, 0) (4, 6) Potential Entrant

Question 2. A. [25 points] Suppose the market for cigarettes is characterized by the following information: Qd = 70 – 5P [Demand] Qs = 3P – 10 [Supply] [Note: P = price per unit; Qd = thousands of units demanded; Qs = thousands of units supplied] Suppose the government imposes a sales tax of $2 per unit.

Answer questions (i) through (v) below:

i) Calculate the magnitude of the consumer surplus and producer surplus in the pre-tax equilibrium.

ii) Calculate the tax revenue in the post-tax equilibrium. iii) Calculate the change in consumer surplus due to the sales tax.

iv) Calculate the change in producer surplus due to the sales tax.

v) Calculate the Dead-Weight-Loss due to the sales tax.

B. [25 points] Suppose the government imposes a price ceiling of $50 on a market characterized by the following information:

Qd = 700 - 2P Qs = 100 + 4P

[Note: P = price per unit; Qd = hundreds of units demanded; Qs = hundreds of units supplied] Calculate the magnitude of deadweight loss from the price ceiling. Find a price floor that will result in the same magnitude of deadweight loss.

Explanation / Answer

Price after imposition of quota is $1.6

Substitute this value into domestic demand and new domestic supply function. At this price, domestic quantity demanded is 136 units and domestic quantity supplied is 104 units.

It means the nation imports 32 units.

Following figure shows the two triangles that are deadweight loss resulting from quota:

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