Market Equilibrium and Taxes  -MT445-2 Paper                                                                                       

Assignment: Market Equilibrium and Taxes

In this Assignment, you will examine different factors that affect supply and demand, and also supply and demand equations to calculate the equilibrium price and quantity. In addition, you will evaluate the effects of imposing per unit tax on market price, quantity and economic welfare.

Instructions: Answer all of the following questions. You are required to follow proper APA format. Read the Criteria section below for more information before you begin this Assignment.

In this Assignment, you will be assessed on the following outcome:

MT445-2: Analyze the effects of changes in demand and supply on market equilibrium.

Sample paper

Market Equilibrium and Taxes

Question 1

Analyze what would happen to equilibrium price and quantity in the market for Pepsi if the following occurred. Briefly explain your answers.

1. 1. The price of Coke decreases.

If the price of Coke decreases, the equilibrium price and quantity on the market for Pepsi would shift downwards or decrease. This is because Coke and Pepsi are substitute products. Thus, if the price of Coke decreases, the demand for Pepsi would reduce since people would opt for Coke. Pepsi would be forced to reduce its price to attract more customers.

1. 2. Average household income falls from $50,000 to $43,000

If the average household income falls from $50,000 to $43,000, the quantity of Pepsi demanded would also fall relatively to the income changes. This would ultimately call for a price reduction in order to Pepsi to increase sales. The decrease in quantity demanded is because Pepsi is a normal good. Thus when consumers lower incomes to spend, they may tend to reduce their consumption of particular goods and services that are not basic in life.

1. 3. There are improvements in soft-drink bottling technology.

Improvements in soft-drink bottling technology can reduce production costs for Pepsi. Thus, these improvements would lead to higher supply of Pepsi in the market. This is because the company can be able to make more units of the product while using fewer resources. The product can thus be sold at a cheaper price.

d.The price of sugar increases and the Pepsi launches an extremely successful advertising campaign.

If the price of sugar increases, the cost of production would increase. Pepsi would have to sell each unit at a relatively higher price. Due to the successful advertising campaign, majority of consumers would be willing to buy Pepsi at a relatively higher price. As such, the demand for Pepsi would not decrease.

Question 2

Analyze the following demand and supply equations to answer the questions.

Demand Equation: Qd = 100 – 4P

Supply Equation: Qs = 10 + 6P

1. 1. What is the equilibrium price? What is the equilibrium quantity?

Hint: Equate Qd = Qs. Solve for the equilibrium price and then the quantity.

Qd = Qs

100 – 4P = 10 + 6P

P = 9

The equilibrium price is 9.

Qd = 100 – 4P.

Qd = 100 – 4(9) = 64

Equilibrium quantity = 64 units

1. 2. Assume the government places a price ceiling at $7 in the market. What is quantity demanded? What is quantity supplied? Is there a shortage or a surplus?

Qd = 100 – 4P; Qd = 100 – 4(7) = 72 units

Qs = 10 + 6P; Qs = 10 + 6(7) = 52 units

There is a shortage of 20 units.

Question 3

Using the diagram below, answer the following questions:

1. 1. How much is the per-unit (pack) tax on cigarettes?

The per-unit tax is $1

1. 2. What price do consumers pay after the tax?

They pay $5.50

1. 3. How much tax revenue is collected?

18 billion.

1. 4. What is the amount of deadweight loss after the tax is imposed on cigarettes?

Deadweight loss is 17.5