Question

(for part (a), assume apples and peanuts are substitutes in consumption.)

T 2. Suppose a tax of $1 per pound is put on apples. (Be very brief in your answers.) a. What will happen to the output of peanuts (perhaps a substitute?) and the price to the sellers of peanuts? Draw a graph as part of your answer. b. Given that apples grow from plants that last a long time, and are not costless to remove, what will happen to the value of apple land? c. What will happen to the value of general farm tractors? d. What will happen to the value of specific apple growing equipment?

Answer 1

A tax of $1 per pound on apple which will reduce the consumption level.

a) Peanut a substitute of apple will be consumed more by the consumer as they are rational and tries to spend less on the good which is cheaper which reduce the consumption level of apple. When demand of peanuts rises, price is likely to rise. The graph for peanut market is:

- - - - - - '(

b) As apple consumption will fall, there trees are costly to grow, people would not be sure about letting apple tree dry as it is very costly to grow again. When they still use that land without selling much of apple, land prices are likely to fall due to falling demand of land.

c) As farm tractors as complements to apple production. When apple production rises, demand for tractors rises and vice versa. When there is less consumption of apples, demand of tractors is likely to fall which will cause prices also fall of tractors.

d) Value of specific apple growing equipment will see more specific downward trend in their prices as tractors can be used for harvesting for other plants too while these specific equipment can only be used for apply harvest.