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Equilibrium Output of Knives

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The long-run supply curve for a particular type of kitchen knife is horizontal line at a price of $3 per knife. The demand curve for such a kitchen knife is

QD = 50-2P

Where QD is the quantity of knives demanded (in millions per year) and P is the price per knife (in dollars).

a. What is the equilibrium output of such knives?

b. If a tax of $1 is imposed on each knife, what is the equilibrium output of such knives? (Assume that the tax is collected by the government from suppliers of knives)

c. After the tax is imposed, you buy such a knife for $3.75. Is this the long-run equilibrium price?

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Solution:

a. What is the equilibrium output of such knives?

Since supply is horizontal at $3, means any price less than it will lead to zero supply.
Equilibrium output will be Q=50-2*3=46 millions per year.

b. ...

Solution Summary

Solution explains the steps to determine equilibrium price and quantity of a particular type of kitchen knife. It also studies the effect of tax on equilibrium.

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