Section Handout # 1 Solution Continued_Solutions

Section Handout # 1 Solution Continued_Solutions - Soluti...

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Solution for Section Handout 2. Demand: XD = 5 – 1p Supply: XS = -1+1p a) market equilibrium price and quantity X = 2 P = 3 b) Notice that demanders determine their demand quantity according to the price that they should pay and that suppliers determine their supply quantity according to the price that they will receive. Suppose that the market price is P.(This price is including tax) Then demanders have to pay p. the demand function : XD = 5 – 1p (same as before) But, Suppliers can only receive p – t new supply function : XS = -1 + 1(p-t) Government wants equilibrium quantity, X, to be 1. Just plug X = 1 into the demand function, then P will be the market price. => P= 4 (Remark: In any cases, so far as equilibrium is concerned, we should have XD = XS) How about a per unit tariff, t? We already have X=1 and P=4. Plug these into the new supply function. Then, we have t = 2. So, the final after-tariff demand price is P = 4 and the final after-tariff supply price is P-t =2. In order to see graph, refer to what professor Wissink drew in the Friday’s class.
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This homework help was uploaded on 02/19/2009 for the course ECON 3010 taught by Professor Wissink during the Fall '07 term at Cornell University (Engineering School).

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Section Handout # 1 Solution Continued_Solutions - Soluti...

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