Question

6. Tom and Jack both love drinking sodas, Tom has a demand for soda P = 5-20. Jack has a demand P 5 -50. Assume there are only two of them buying soda. What will be the market demand for soda? 7. Assume the market demand for soda is P = 20 - Q. The market supply is P = 30. Find the equilibrium. Also, draw graph. 8, Now government applies a $3 price ceiling. What happens to the market? Derive the new market quantity and price. Then draw a graph to show it.

Answer 1

Answer:

6. Market demand is the sum of individual demands. So market demand will be Tom's demand + Jack's demand

That is, (5 - 2Q) + (5 - 5Q)

Market demand = 10 - 7Q

7. By equating market demand ans market supply, we get equilibrium price and quantity.

20 - Q = 3Q   

20 = 3Q + Q= 4Q

SO, Q = 20/ 4 = 5

P = 20 - Q ; substituting value for Q, we get value of P

P = 20 - 5 = 15

Equilibrium price = $15; quantity = 5 units

8. With $3 price ceiling, the new quantity and price will be:

Graph:

  

Price 1 1 6 8 10 12 14 16 e 20 22 24 2

New price - $3, quantity - 17 units

supply now is at 1unit, demand at 17 units. So there will be shortage of 16 units.

9. Theoretically, yes. It is possible to have a black market as shown in the graph (dotted line)

Now the 1 unit quantity will have a very high demand and consumers willing to pay $19. So revenue will be $19 ($19*1 unit)

With price ceiling, the revenue is $3 ($3 * 1 unit)

So the profit would be 19 - 3 = $16

10. With tax, the new price will be as shown in the graph:

rice 4 5 6 8 10 12 14 16 de

Price = $17, quantity = 5 units

Tax incidence: Producers have to pay 6 * 3 = $18

Consumers pay 2 * 3 = $6

Total tax revenue = 8 * 3 = $24 (for the government)