demand and supply

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July 29th 2007, 08:29 PM
princess_anna57

demand and supply

Demand and supply for a commodity are given by

qd = 18 - 2p and qs = -10 + 5p (1 - t)

respectively where t is a tax levied on each unit sold (to be paid by the producer).

a) Draw the supply and demand curves on the same diagram when t = 0

b) Find the equilibrium quantity sold when t = 0

c) Find the equilibrium quantity sold when t = 0.32 (i.e a tax rate of 32%).

d) Derive a functional relationship between p and t in equilibrium.
July 29th 2007, 08:38 PM
tukeywilliams

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Green is quantity supplied, red is quantity demanded for $t = 0$ .

For (b) set $qd = qp$ or $18-2p = 5p-10, p = 4$ . So $t = 0, \ p = 4$ .

For (c) set $18-2p = -10 + 3.4p$ . So $t = 0.32, \ p = 5.\overline{185}$ .

For (d) use (b) and (c) to try and find a functional relationship between $p$ and $t$ (i.e. is it a linear equation $y = ax+b$ , a quadratic $y = ax^2 + bx +c$ etc.).
July 29th 2007, 09:33 PM
princess_anna57

Linear?
July 29th 2007, 10:01 PM
princess_anna57

So is that all I'll need to write? That the functional relationship is linear?
July 29th 2007, 10:03 PM
tukeywilliams

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Actually I think its quadratic now that I have plotted a few more points. We have to be careful about overfitting/ extrapolating data.

$t = 0, \ p = 4$

$t = 1, \ p = 14$

$t = 2, p \approx - 9.4$

So the functional form is $p = at^2 + bt + c$ where $a,b,c$ are constants.
July 30th 2007, 01:36 AM
princess_anna57

hmm... interesting. :)

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