1. Consider the market for cell phones in Celltown. Suppose that the inverse demand curve is P = -2Qd+ 300 and that the inverse supply curve is P = 3Qs + 50. %3D %3D
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1. Consider the market for cell phones in Celltown. Suppose that the inverse demand curve is P = -2Qd + 300 and that the inverse supply curve is P = 3Qs + 50.
a. Sketch the inverse supply and inverse demand curves. b. Calculate the equilibrium price and quantity. c. Compute consumer surplus (CS), producer surplus (PS), and total surplus. d. Suppose the Mayor of Celltown institutes a price floor of F. = $250 in order to promote the new technology. It is illegal to sell cell phones at a price below k . What is the quantity transacted in the market with the price floor? e. Compute the change in CS and the change in PS. f. Compute the change in total surplus. If you were an economic advisor to the Mayor whose goal is to maximize the total surplus of the city, would you advise continuing the policy or not? Explain. g. A representative of the Association of Cell Phone Manufacturers arrives at the Mayor's office to lobby against eliminating the price floor. i. Explain why economic theory predicts that producers might be willing to lobby for the policy. Are producers always in favor of price floors? ii. What is the most the lobbyist would be willing to donate to the Mayor's reelection campaign if the mayor promises to keep the policy? h. The Chief of Police reports arresting illegal grey market cell phone vendors. These vendors sell cell phones after the quantity at the price floor has already been sold. The illegal grey market price is always below the price floor. Explain why economic theory predicts the existence of a grey market.
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