Explore BrainMass

Explore BrainMass

    Perfectly Elastic demand and Equilibrium

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    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?

    © BrainMass Inc. brainmass.com June 3, 2020, 10:21 pm ad1c9bdddf
    https://brainmass.com/economics/demand-supply/perfectly-elastic-demand-and-equilibrium-227338

    Attachments

    Solution Preview

    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

    ADVERTISEMENT