No imports and exports are possible. The demand curve is Qd=10-Pd, where Qd is the quantity demanded (in millions of bushels) when the price consumers pay is Pd. The supply curve is
where Qs is the quantity supplied (in millions of bushels) when the price producers receive is Ps.
a) What are the equilibrium price and quantity?
b) At the equilibrium in part (a), what is consumer surplus? producer surplus? deadweight loss? Show all of these graphically.
c) Suppose the government imposes an excise tax of $2 per unit to raise government revenues. What will the new equilibrium quantity be? What price will buyers pay? What price will sellers receive? d) At the equilibrium in part (c), what is consumer surplus? producer surplus? the impact on the government budget (here a positive number, the government tax receipts)? deadweight loss? Show all of these graphically.
e) Suppose the government has a change of heart about the importance of corn revenues to the happiness of the Pulmonian farmers. The tax is removed and a subsidy of $1 per unit is granted to corn producers. What will the equilibrium quantity be? What price will the buyer pay? What amount (including the subsidy) will corn farmers receive?
f) At the equilibrium in part (e), what is consumer surplus? producer surplus? What will be the total cost to the government? deadweight loss? Show all of these graphically.
g) Verify that for your answers to parts (b), (d), and (f) the following sum is always the same: consumer surplus producer surplus budgetary impact deadweight loss. Why is the sum equal in all three cases?
12.14. Suppose that Acme Pharmaceutical Company discovers a drug that cures the common cold. Acme has plants in both the United States and Europe and can manufacture the drug on either continent at a marginal cost of 10. Assume there are no fixed costs. In Europe, the demand for the drug is QE=70-PE, where QE is the quantity demanded when the price in Europe is PE. In the United States, the demand for the drug is QU=110-PU, where QU is the quantity demanded when the price in the United States is PU.
a) If the firm can engage in third-degree price discrimination what price should it set on each continent to maximize its profit?
b) Assume now that it is illegal for the firm to price discriminate, so that it can charge only a single price P on both continents. What price will it charge, and what profits will it earn?
c) Will the total consumer and producer surplus in the world be higher with price discrimination or without price discrimination? Will the firm sell the drug on both continents?
12.15. Consider Problem 12.14 with the following change. Suppose the demand for the drug in Europe declines to QE=30-PE. If the firm cannot price discriminate, will it be in the firm’s interest to sell on both continents?
12.16. Consider Problem 12.14 with the following change. Suppose the demand for the drug in Europe becomes QE=55-0.5PE. Will third-degree price discrimination increase the firm’s profits?