Question

Q1: The market for kumquats is represented by Q = 2,400P – 1,000 and Q = 20,000 – 1,600P where Q is kilograms of kumquats and P is the price of kumquats per kilogram.

a) What are the equilibrium price and equilibrium quantity in this market? Show your calculations.

b) How much total revenue do kumquat farmers earn at the market equilibrium? Show your calculations.

c) Suppose the government imposes a quota of 8,000 kilograms in the market for kumquats. Is this quota binding on the market? Explain.

d) What is the new equilibrium price of kumquats as a result of the quota of 8,000 kilograms? Show your calculations.

e) What is the new total revenue as a result of the quota of 8,000 kilograms? Show your calculations.

f) Is demand elastic or inelastic when the price is between the original equilibrium price and the new equilibrium price? Explain or show your calculations.

g) Are kumquat farmers in favour of the government’s quota of 8,000 kilograms? Explain. Hint: Kumquat farmers care about profit, which equals total revenue – total cost.

h) Instead of a quota of 8,000 kilograms, suppose the government imposes a quota of 9,200 kilograms in the market for kumquats. Is this quota binding on the market? Explain.

i) What is the new equilibrium price of kumquats as a result of the quota of 9,200 kilograms? Show your calculations.

j) What is the new total revenue as a result of the quota of 9,200 kilograms? Show your calculations.

k) Is demand elastic or inelastic when the price is between the original equilibrium price and the new equilibrium price in i)? Explain or show your calculations.

l) Are kumquat farmers in favour of the government’s quota of 9,200 kilograms? Explain. Hint: Kumquat farmers care about profit, which equals total revenue – total cost.

Answer 1