Suppose the demand and supply curves of salt are given by. qD = 1000 �

1.	Suppose the demand and supply curves of salt are given by. qD = 1000 – P qS = 700 + 2P 1. Find the equilibrium price and quantity 2. Suppose that the price of input used to produce salt has increased so that the supply curve is qS = 400 + 2P How does the equilibrium price and quantity change? Does the change conform to your expectation?3. Suppose the government has imposed a tax of 3 per unit of salt. How does it affect the equilibrium price and quantity?
Answer» 1. equilibrium price and quantity q^D = 1000 – P q^S = 700 + 2P For equilibrium q^D = q^S 1000 – P = 700 + 2P 1000 – 700 = 3 P 3P = 300 P = 300/3 = 100 Put the value of P in supply equation q^S = 700 + 2P q^S= 700 + 2×100 q^S =700 + 200 = 900 Therefore the equilibrium price = ? 100 and the equilibrium quantity is = 900 units 2. For equilibrium q^D = q^S 1000 – P = 400 + 2P 1000 – 400 = 3P 600 = 3 P P = 600 / 3 = 200 Put the value of P in demand equation Q^D = 1000 – P Q^D = 1000 – 200 = 800 Therefore the equilibrium price = ₹200 and the equilibrium quantity is = 800 units This change confirms to our expectations, i.e., rise in input prices raises prices and lowers supply. 3. q^D = 1000 – P q^S = 700 + 2P When ₹3 as tax is imposed on sale of salt the new demand and supply function will change q^D = 1000 – (P + 3) q^S = 700 + (2P +3) In part A equilibrium price was ₹100 which goes up to ₹103 with imposition of tax q^D = 1000 – (100 + 3) = 1000 – 103 =897 q^S = 700 + (2P + 3) = 700 + 2(100 + 3) = 700 + 2×103 = 700 + 206 = 906 q^D < q^S Therefore, new price and quantity has to be adjusted.

Suppose the demand and supply curves of salt are given by. qD = 1000 – P qS = 700 + 2P 1. Find the equilibrium price and quantity 2. Suppose that the price of input used to produce salt has increased so that the supply curve is qS = 400 + 2P How does the equilibrium price and quantity change? Does the change conform to your expectation?3. Suppose the government has imposed a tax of 3 per unit of salt. How does it affect the equilibrium price and quantity?

Answer»

1. equilibrium price and quantity

q^D = 1000 – P

q^S = 700 + 2P

For equilibrium

q^D = q^S 1000 – P = 700 + 2P

1000 – 700 = 3 P

3P = 300 P = 300/3 = 100

Put the value of P in supply equation

q^S = 700 + 2P

q^S= 700 + 2×100

q^S =700 + 200 = 900

Therefore the equilibrium price = ? 100 and

the equilibrium quantity is = 900 units

2. For equilibrium q^D = q^S

1000 – P = 400 + 2P

1000 – 400 = 3P

600 = 3 P

P = 600 / 3 = 200

Put the value of P in demand equation

Q^D = 1000 – P

Q^D = 1000 – 200 = 800

Therefore the equilibrium price = ₹200 and the equilibrium quantity is = 800 units This change confirms to our expectations, i.e., rise in input prices raises prices and lowers supply.

3. q^D = 1000 – P

q^S = 700 + 2P

When ₹3 as tax is imposed on sale of salt the new demand and supply function will change

q^D = 1000 – (P + 3)

q^S = 700 + (2P +3)

In part A equilibrium price was ₹100 which goes up to ₹103 with imposition of tax

q^D = 1000 – (100 + 3) = 1000 – 103 =897

q^S = 700 + (2P + 3)

= 700 + 2(100 + 3)

= 700 + 2×103

= 700 + 206

= 906 q^D < q^S

Therefore, new price and quantity has to be adjusted.

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