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Perfectly Elastic demand and Equilibrium

Assume that the weekly supply of 16 oz bottles of soda at convenience stores in the Twin Cities of Minneapolis and St. Paul is a function of price such that:

Qs = -20 + 80P

Where Q is the number of sodas sold in convenience stores (in thousands) and P is the soda price. Assume demand is perfectly elastic at a price of $ 1.

A)Derive the soda supply curve where price is expressed as a function of output. Calculate the equilibrium level of output and convenience store sales revenue.

B)Derive a second curve based upon the assumption convenience store sales become subject to a 5-cent recycling fee. Calculate the price and quantity effects of the recycling fee. With perfectly elastic demand, who pays the economic burden of such a fee?

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Solution is attached herewith as word document also.

Solution:

Derive the soda supply curve where price is expressed as a function of output. Calculate the equilibrium level of output and convenience store sales revenue.

Qs=-20+80P
80P=20+Qs
P=(20+Qs)/80
P=0.25+0.0125Qs -------------(1)

Demand is perfectly elastic at a price of $1, A firm can sell unlimited quantity at this price. So, equilibrium Price is $1. ...

Solution Summary

Solution describes the steps for finding equilibrium price and quantity of soda bottles in case demand is perfectly elastic. It also studies the effect of 5 cent recycling fee on equilibrium.

$2.19