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Suppose the demand and supply curves of salt are given by: q^(D) = 1, 000 - P q^(s) = 700 + 2p (i) Find the equilibrium price and quantity. (ii) Now suppose that the price of an nput used to produce salt has increased so that the new supply curve is q^(s) = 400 +2p. How does the equilibrium price and quantity change? Does the change conform to your expectation? (iii)Suppose the government has imposed a tax of₹3 per unit on sale of salt. How does it affect the equilibrium price and quantity? |
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Answer» <P> Solution :(i)At EQUILIBRIUM , `q^(D) = q^(s)`It means , 1,000 - p = 700 + 2p p =₹ 100 Putting the value of equilibrium price in the equation of demand curve or supply curve, we get `q^(D)`1,000-100 =900 Equilibrium Price = ₹100, Equilibrium Quantity = 900 units (ii) When price of input increases, the new supply curve becomes `q^(s) ` =400+2p To calculate new equilibrium price and quantity, equating `q^(D) and q^(s)` 1,000- p = 400 + 2p p - ₹ 200 Putting the value of equilibrium price in the equation of demand curve or supply curve, we get: `q^(D)` = 1,000 -200 =800 Equilibrium Price = 200 = ₹ 200, Equilibrium Quantity = 800 units Thus, the equilibrium price increases and equilibrium quantity falls due to RISE in the price of inputs. (iii)When tax of ₹ 3 per unit of sale is imposed on the commodity, the new supply curve becomes `q^(s) ` = 700 + 2 (p - 3) `q^(s) ` = 700 + 2p - 6 `q^(s)`= 694 +2p To calculate new equilibrium price and quantity equating `q^(D) and q^(s)` 1,000 -p =694 + 2p p =₹102 Putting the value of equilibrium price in the equation of demand curve or supply curve, we get `q^(D)` =1,000 - 102 = 898 Equilibrium Price =₹ 102, Equilibrium Quantity = 898 units Thus, the equilibrium price increases and equilibrium quantity falls due to tax of₹ 3 per unit on sale of salt. |
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