Question

11. After fixing Hideous & Manky's and Cheap&Awful's pricing problems in the past, business has been thriving. Their demand curves are still QCA = -4P + 8 and OHM = -0.6P + 6, respectively. The supply curves are now given by OCA = 2P and QÀM = 0.6P. a. Draw separate demand and supply diagrams for the companies and compute total revenue in the equilibria. Out of the blue, the local government decides to implement a price ceiling of 0.60 Euros for shirts and a price floor of 3.50 Euros for pants. HM sells pants and CA sells shirts. b. What is going to be the consequence of these measures by the government? By what percentage is the revenue going to change in each market? The government removes the previously implemented price floor and ceiling, but decides to levy a 1 Euro tax on pants instead. c. If the tax is levied on the buyer, how much would a pair of pants have to cost in order for the original quantity demanded to stay put? d. How many pairs of pants are the buyers actually going to demand and at what price? Why can't the buyers just buy the initial quantity at the original price minus the 1€ tax? e. Do buyers or sellers carry a higher tax burden? After its experiments with price restrictions and taxes, the government finally decides to levy a 2 Euro tax on sellers of pants and introduces a price ceiling of 5.5 Euros for pants. f. What quantity of pants will be sold under these conditions?

Answer 1

Do note that as HOMEWORKLIB Guidelines we are only allowed to solve the first four subparts and not more.

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