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Suppose the demand and supply curves of salt are given by: `0ltplt15` `q^(D)=1,000-p` `q^(S)=700+2p` (a) Find the equilibrium price and quantity. (b) Now suppose that the price of an input used to produce salt has increased so that the new supply curve `q^(S)=400+2p.` How does the equilibrium price and quantity change? (c) Suppose the goverment has imposed at tax of rupee 3 per unit on sale of salt. How does it affect the equilibrium price and quantity? |
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Answer» (a) At equilibrium, `q^(D)=q^(S)` It means, 1,000-p=700+2p p= rupee 100 Putting the value of equilibrium price in the equation of demand curve, we get: `q^(D)=1,000-100=900` Equilibrium Price= rupee 100, Equilibrium Quantity=900 units When price of input increases, the new supply curve becomes: `q^(S)=400+2p` To calculate new equilibrium price and quantity, equantity, equating `q^(D)" and q^(S)` `1,000-p=400+2p` p=rupee 200 Puting the value of equilibrium price in the equation of demand curve or supply curve, we get: `q^(D)=1,000-200=800` Equilibrium Price = rupee 200, Equilibrium Quantity=800 untis Thus, the equilibrium price increases and equilibrium quantity falls due to rise in the price of inputs. (c) When tax fo rupee 3 per unit sale is imposed on the commodity, then the new supply curve becomes: `q^(S)=700+2(p-3)` `q^(S)=700+2p-6` `q^(S)=694+2p` To calculate new equilibrium price and quantity, equating `q^(D)" and "q^(S)` 1,000-p=694+2p p= rupee 102 Putting the value of equilibrium price in the equation of demand curve or supply curve, we get: `q^(D)=1,000-102=898` Equilibrium Price = rupee 102, Equilibrium Quantity=898 units Thus, the equilibrium price increases and equilibrium quantity falls due to tax of rupee 3 per unit on sale of salt. |
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