Suppose the demand and supply curves of salt are given by: = 1,000 - p; = 700 + 2p.
Find the equilibrium price and quantity.
Equilibrium Price (p)* = Rs 100 Equilibrium Quantity (q)* = 900 units
Now suppose that the price of an input used to produce salt has increased so that the new supply curve is = 400 + 2p. How does the equilibrium price and quantity change? Does the change conform to your expectation?
New Equilibrium Price = Rs 200 New Equilibrium Quantity = 800 units The equilibrium price increases and the quantity decreases. This change conforms to the expectation that an increase in input price shifts the supply curve leftward, leading to a higher price and lower quantity.
Suppose the government has imposed a tax of Rs 3 per unit of sale of salt. How does it affect the equilibrium price and quantity?
New Equilibrium Price = Rs 102 New Equilibrium Quantity = 898 units The equilibrium price increases and the quantity decreases compared to the initial equilibrium.
Explanation
The solution follows the methodology provided in the context where equilibrium is found by equating market demand and supply (). For part (a), solving the simultaneous equations yields the initial equilibrium. In part (b), the increase in input price shifts the supply curve, represented by the new equation. Solving with the original demand curve shows the price rise and quantity fall, consistent with the concept of excess demand at the original price which pushes the price up. In part (c), the imposition of a unit tax effectively shifts the supply curve, modifying the supply equation to . Solving for the new equilibrium shows the price paid by consumers rises and quantity falls.