Microeconomics 2nd Edition by Douglas Bernheim

Exercise 1

Suppose that the formula for ice cream demand is Q d I = 85 4 P I + 6 P P and the formula for pie demand is Q d P = 110 5 P P + 2 P I. Here, pie and ice cream are substitutes instead of complements. Continue to assume that formulas (2) and (4) describe the supply of ice cream and pie. (a) Solve for and graph the market-clearing curves for pie and ice cream. Are they downward sloping, as in Figures 16.2(b) and 16.3(b), or upward sloping Why (b) Find the general equilibrium prices and levels of consumption. Show the general equilibrium graphically. (c) Solve for the partial and general equilibrium effects of a $3 sales tax on ice cream. Illustrate these effects graphically. Is the general equilibrium effect on the price of ice cream larger or smaller than the partial equilibrium effect Why Does the pie price in general equilibrium rise or fall Why