Demand and Supply
Q1. Illustrates the market for chocolate bars has the following demand and supply
schedules: [1.5Marks]
Price Quantity Demanded Quantity Supplied
$3 111 26
$4 100 53
$5 80 80
$6 64 92
$7 51 111
$8 37 120
a. Graph the demand and supply curves. What is the equilibrium price and quantity in this market?
b. If the actual price in this market were above the equilibrium price, what would
drive the market toward the equilibrium?
c. If the actual price in this market were below the equilibrium price, what would
drive the market toward the equilibrium?
Q2. Illustrates the market for pizza is characterized by a downward-sloping demand curve
and an upward-sloping supply curve. [1.5 Marks]
a. Draw the competitive market equilibrium. Label the price, quantity, consumer
surplus, and producer surplus. Is there any deadweight loss? Explain.
b. Suppose that the government forces each pizzeria to pay a $1 tax on each pizza sold. Illustrate the effect of this tax on the pizza market, being sure to label the consumer surplus, producer surplus, government revenue, and deadweight loss. How does each area compare to the pre-tax case?
c. If the tax were removed, pizza eaters and sellers would be better off, but the
government would lose tax revenue. Suppose that consumers and producers voluntarily transferred some of their gains to the government. Could all parties (including the government) be better off than they were with a tax? Explain using the labeled areas in your graph
Q3. Suppose that a market is described by the following supply and demand equations:
[2Marks]
QS = 2P
QD = 300 – P
a. Solve for the equilibrium price and the equilibrium quantity.
b. Suppose that a tax of T is placed on buyers, so the new demand equation is
QD = 300 – (P + T).
Solve for the new equilibrium. What happens to the price received by sellers, the price paid by buyers, and the quantity sold?
c. Tax revenue is T X Q. Use your answer to part (b) to solve for tax revenue as a function of T. Graph this relationship for T between 0 and 300.
d. The deadweight loss of a tax is the area of the triangle between the supply and
demand curves. Recalling that the area of a triangle is 1 ⁄2 x base x height, solve for deadweight loss as a function of T. Graph this relationship for T between 0 and 300. (Hint: Looking sideways, the base of the deadweight loss triangle is T, and the height is the difference between the quantity sold with the tax and the quantity sold without the tax.)
e. The government now levies a tax on this good of $200 per unit. Is this a good
policy? Why or why not? Can you propose a better policy?
