Market Equilibrium and Taxes
In this assignment, you will examine different factors that affect supply and demand, and also supply and demand equations to calculate the equilibrium price and quantity.
In addition, you will evaluate the effects of imposing per unit tax on market price, quantity and economic welfare.
1. Analyze what would happen to the equilibrium price and quantity in the market for Pepsi if the following occurred. Briefly explain your answers.
1.a. The price of Coke decreases.
b. Average household income falls from $50,000 to $43,000.
c. There are improvements in soft-drink bottling technology.
d. The price of sugar increases and the Pepsi launches an extremely successful advertising campaign.
2. Analyze the following demand and supply equations to answer the questions.
Demand Equation: Qd = 100 – 4P
Supply Equation: Qs = 10 + 6P
1.a. What is the equilibrium price? What is the equilibrium quantity?
Hint: Equate Qd = Qs. Solve for the equilibrium price and then the quantity.
b. Assume the government places a price ceiling at $7 in the market. What is quantity demanded? What is quantity supplied? Is there a shortage or a surplus?
3. Using the diagram below, answer the following questions:
(Description of graph: The following diagram shows the effects of tax increase on price and quantity of cigarettes. The initial equilibrium values before tax increase occurs at the equilibrium Quantity of 20 billion packs of cigarettes at the equilibrium price of $4.50. Assume the government increases the tax rate on cigarettes per pack, and this action of the government shifts the supply curve to the left. The new equilibrium values after tax increase are new equilibrium Quantity of 18 billion packs of cigarettes at the new equilibrium price of $5.50. Note also that the minimum producers’ price along supply graph at new equilibrium after tax increase is $4.25 per pack of cigarettes.)
1.a. How much is the per-unit (pack) tax on cigarettes? Show your wo325rk.
b. What price do consumers pay after the tax?
c. How much tax revenue is collected? Show your work.
d. What is the amount of deadweight loss after the tax is imposed on cigarettes? Show your work.
