Question

1. Consider the following demand and supply curves:

P	20	18	16	14
Q	0	1	2	3

P	2	3	4	5
Q	0	1	2	3

a. What is the equation of this demand function?

b. What is the equation of this supply function?

c. Solve for equilibrium price and quantity.

D. The market demand and supply for jet fuel is provided by the following functions: Qd = 140 - P Qs = -160 + 4P Where: P= Price per barrel Q= quantity in thousands of barrels If the government imposes a tax of t per unit on quantity supplied and the market adjusts the supply function to include the tax when t = $5/barrel:

a. Find the initial equilibrium price and quantity?

b. Find the new equilibrium price and quantity after the tax.

c. Illustrate with a diagram how this tax will affect the market demand and supply curves.

d. Who bears the tax and by how much?

E.. Suppose the airline industry is confronted with a 10% increase in the negotiated wages for their pilots but ticket prices remain constant. Explain with the aid of graphs why the airline might not wish to increase its ticket prices.

Answer 1

1.Slope of demand curve=change in price/change in quantity

Change in price=18-20=-2

Change in quantity=1-0=1

Slope=-2.

Intercept=Maximum price the consumer is willing to pay=20

Demand equation=a-bp

a=intercept

b=slope

Q=20-2P

B.Equation of supply=-c+dc

C= intercept(the minimum price that the producer is Willing to offer.

d=slope

Slope of supply curve= change in price/Change in quantity

Change in price=3-2=1

Change in quantity=1-0=1

Slope of supply curve=1/1=1

Intercept=2

Equation of supply curve:

Q=-2+p

At equilibrium: quantity demanded= Quantity supplied

20-2P=-2+P

3P=22

P=7.4

Q=-2+7.4=5.4