Demand for potatoes is given by p(q) = 11 − q and supply by p(q) = 1 + q. (a) [6 marks] What are equilibrium prices and quantities in this case? Calculate consumer surplus and producer surplus. (b) [6 marks] Assume that there is a unit tax of t = 2. What price do producers get? What is the price that consumers pay? How high is tax revenue? (c) [6 marks] Calculate consumer surplus, producer surplus and deadweight loss for the case in (b). Now set the tax to zero again t = 0. Assume that because of war supply shifts to p(q) = 1+4q. The government puts in place a price cap such that price is regulated to be the same as in (a). (d) [7 marks] What are the effects on producer surplus and consumer surplus of the price cap? (e) [7 marks] In situations as in (d) price caps are often combined with rationing–a certain allotment per person. What might be an economic argument for rationing? Against? EC402
1. Answer all parts (a)-(e) of this question. A risk-averse expected-utility maximizer has initial wealth w and utility function u. She faces a risk…