Question

Suppose a market’s demand and supply curves take on the following characteristics:

QD = 100 – 2.9(P) + 0.93(Y – T)

QS = 2(P)

where:

QD quantity demanded

QS quantity supplied

P price of the commodity

Y personal income

T personal taxes  

Given the above model, please answer the following questions:

1. What is the market-clearing price and quantity if personal taxes (T) equal zero and personal income (Y) is $400?

2. Suppose a personal tax rate of 20 percent is introduced. a. What is the impact on the market equilibrium price and quantity? b. What is the tax revenue received by the government? c. How much did total revenue received by producers change? d. How much did total expenditures by consumers change?

3. Suppose personal income rose by 10 percent. Using the tax rate of 20 percent introduced in question 2 above, a. What is the impact on the equilibrium price and quantity previously calculated in question 2? b. What is the income elasticity of demand? What does this calculated elasticity indicate about this product?

4. If we added the real wealth term “+0.01(W)” to the demand equation, how much would your answer change in question 1 (price and quantity) if the level of real wealth was $3,000 (i.e., W = 3,000)? Draw a graph depicting the effects this has upon market equilibrium compared to your answer to part 1

Answer 1

Price and quantity falls.

Total revenue in A.=P*Q

TR=96.34*192.68=18,568.79

TR in B=96.29*192.58=18,543.53

Fall in TR=18,568.79-18,543.53=25.26

Total expenditure=P*Q

Fall in total expenditure= fall in TR.

ONLY 4 QUESTIONS NEEDS TO BE ANSWERED IF A QUESTION HAS MORE THAN 4 SUB PARTS.