Week 3 Chapter 2: Market Forces: Demand and Supply

For
this week read Chapter 2, pages 48-68

Answer
the following questions:

Question 1.

The structure of an industry includes the number of
participants, technology, and the ease of entry and exist. When the number of
sellers is many, a single seller is said to operate under condition of
perfect competition. Suppose the company ABC produces pizza (Good X) and
operates in a competitive market and uses cheese as its main input. What would
happen to the supply of good X in each of the following situations.

a.
The price of cheese
increases.

Hint:

1. Draw the demand and
supply curves for a typical competitive market. Label each curve and identify
the initial points (D⁰, S^o , E⁰ , P⁰ and Q⁰ ).

2. Now, show which curve
(demand or supply) will be affected if the input cost of cheese increases and
why? Label the affected curve (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).Review the topic on
Comparativestatistics.

b.
What is an excise tax.
Suppose an excise tax of $2 is imposed on Good X. Explain how this excise tax
will affect the market for Pizza.

Hint: Here, again begin your
analysis from the initial values of equilibrium as given under comparative
statics. Numbers are not relevant. Simply show the impact of the tax on the
equilibrium price and quantity.

c.
What is an “ad valorem”
tax? Suppose an ad valorem tax of 3 percent is imposed on good X.

Hint: Use comparative statics,
show how the supply curve will be affected under this situation. Simply show
the impact of the tax on equilibrium Price and Quantity

d.
A technological change
reduces the cost of producing additional units of good X.

Hint: Use theapproach given under
part (a)of this question.

Question 2

The question below is about market equilibrium and how to
compute equilibrium values. Suppose demand and supply are given by Qd = 15-2P
and Qs = -3+P.

a.
What are the
equilibrium quantity and price in this market? Show your work?

Hint:

1.
Draw the demand and supply
graph and label all initial points ( D⁰, S⁰, P⁰,
E⁰), following the use of comparative statics given your text on
pages 62-65)

2.
Set demand equal to
Supply and solve the values. See page 62 for a practice problem

3.
Next, insert the
values in the graph.

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