WEEK – 3 HOMEWORK ASSIGNMENT
Q 2) Good X is produced in a competitive market using input A. Explain what would happen to the supply of good X in each of the following situations.
a. The price of input A decreases.
1. Draw the demand and supply curves. Label each curve and identify the initial points (D0, So, E0, P0 and Q0).
2. Now, show which curve (demand or supply) will be affected if the input cost of A decreases and why? Is it the demand or the supply and label accordingly (D1, or S1).
3. What is the new equilibrium? Label as P1, Q1 and E1
4. Give an interpretation as to the new price (higher or lower) and the new equilibrium quantity (higher or lower).
P
0
D2 Price
D
0
S
0
S
1
E
0
E
1
E
1
P
1
P P
0
D
1
Q
1
Q
0
Quantity of Good X
SUPPLY CURVE
If the value of input A decreases, the cost of producing Good X decreases. So the suppliers will be willing to produce more. Therefore, supply of Good X increases and supply curve of Good X will shift to the right as shown in the graph above:
D
0
D
1
P
0
P
1
D2 Price
Quantity of Good X
DEMAND CURVE
If the price decreases, quantity demanded will increase. When supply and demand are equal, the economy is said to be at equilibrium.
b. An excise tax of $3 is imposed on Good X.
If an excise tax of $3 is imposed on Good X, supplier is willing to supply the same quantity of Good X when he receives additional $3 per unit of Good X.
Selling price per unit + $3 excise tax.
More specifically, supply curve will shift vertically up by exactly $3 for each level of output as shown in the figure below:
D2 Price
S
0
+ t
S
0
$3
Quantity of Good X
c. An ad valorem tax of 7 percent is imposed on Good X.
If an ad valorem tax of 7 % is imposed on Good X, it means that the supplier is willing to supply the same quantity of Good X when the unit price of production goes up by 7%.
Selling price per unit x 7% ad valorem tax.
Supply curve will rotate counter clockwise. So the curve will shift further from original curve when the price increases.
D2 Price
S
0
x 1.07 t
S
0
Quantity of Good X
d. A technological change reduces the cost of producing additional units of Good X.
If a technological change reduces the cost of producing additional units of Good X, then the supplier will be willing to produce more. Hence, the supply of Good X increases and ...
