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Equilibrium price and quantity, elastic demand, inelastic supply

1. Suppose the demand is Q = 10 - P and the supply is Q = P + 4. Please verify that the following table gives the quantity demanded and supplied at each given prices. What is the equilibrium price and quantity sold under perfect competition?

Price Quantity Quantity
Supplied Demanded
1 5 9
1.5 5.5 8.5
2 6 8
2.5 6.5 7.5
3 7 7
3.5 7.5 6.5
4 8 6
4.5 8.5 5.5
5 9 5
5.5 9.5 4.5

2. Suppose a $1 per unit tax is levied on consumers so that the buyers pay $1 higher than the sellers, fill in the following table and derive the equilibrium quantity sold as well as the price a buyer pays and the price a seller receives.

Tax Buyer
Buyer Seller Quantity Quantity
Price Price Supplied Demanded
2 1
2.5 1.5
3 2
3.5 2.5
4 3
4.5 3.5
5 4
5.5 4.5
6 5
6.5 5.5

3. Suppose a $1 per unit tax is levied on producers so that the sellers receive $1 less than the buyers pay, fill in the following table and derive the equilibrium quantity sold as well as the price a buyer pays and the price a seller receives.

Tax Seller
Buyer Seller Quantity Quantity
Price Price Supplied Demanded
1 0
1.5 0.5
2 1
2.5 1.5
3 2
3.5 2.5
4 3
4.5 3.5
5 4
5.5 4.5

Exercise 1: Tax Burden

1. Suppose the demand is Q = 10 - P and the supply is Q = P + 4. Please verify that the following table gives the quantity demanded and supplied at each given prices. What is the equilibrium price and quantity sold under perfect competition?

Price Quantity Quantity
Supplied Demanded
1 5 9
1.5 5.5 8.5
2 6 8
2.5 6.5 7.5
3 7 7
3.5 7.5 6.5
4 8 6
4.5 8.5 5.5
5 9 5
5.5 9.5 4.5

2. Suppose a $1 per unit tax is levied on consumers so that the buyers pay $1 higher than the sellers, fill in the following table and derive the equilibrium quantity sold as well as the price a buyer pays and the price a seller receives.

Tax Buyer
Buyer Seller Quantity Quantity
Price Price Supplied Demanded
2 1 5 8
2.5 1.5 5.5 7.5
3 2 6 7
3.5 2.5 6.5 6.5
4 3 7 6
4.5 3.5 7.5 5.5
5 4 8 5
5.5 4.5 8.5 4.5
6 5 9 4
6.5 5.5 9.5 3.5

3. Suppose a $1 per unit tax is levied on producers so that the sellers receive $1 less than the buyers pay, fill in the following table and derive the equilibrium quantity sold as well as the price a buyer pays and the price a seller receives.

Tax Seller
Buyer Seller Quantity Quantity
Price Price Supplied Demanded
1 0 4 9
1.5 0.5 4.5 8.5
2 1 5 8
2.5 1.5 5.5 7.5
3 2 6 7
3.5 2.5 6.5 6.5
4 3 7 6
4.5 3.5 7.5 5.5
5 4 8 5
5.5 4.5 8.5 4.5

Exercise 2: Tax Burden (Continued)

Draw two diagrams to show the effect of a tax on the equilibrium buyer and seller prices as well as the equilibrium quantity sold. One with a relatively elastic demand and an inelastic supply. The other with a relatively inelastic demand and an elastic supply. Compare these two cases in terms of the impact on the buyer price and the seller price.

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Solution Summary

The solution examines equilibrium price and quantity, elastic demand and inelastic supply.

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