Exam 2: Supply and Demand

Correct Answer:

Verified

The partial derivatives of the equilibrium price and quantity with respect to r:
∂p/∂r = -.1
∂Q/∂r = 10
An incremental increase in rainfall will decrease price by $.10 and increase quantity by 10 units of wheat.
The partial derivatives of the equilibrium price and quantity with respect to I:
∂p/∂I = -.05
∂Q/∂I = 5
An incremental increase in consumer disposable income will decrease price by $.05 and increase quantity of wheat by five units.

Correct Answer:

Verified

First rearrange the supply curve,p = Q/3.Sellers must receive this price plus 10% more to pay the tax.Thus p + tax = (1.1Q)/3.Substituting into the demand curve yields Q = 100 - (2.2/3)Q or (5.2/3)Q = 100 or Q = 57.69.Solving for price plus tax yields p + tax = (100 - 57.69)/2 = 21.15.Note price does not rise by 10% of the old price of 20; 21.15 represents the new price plus the 10% tax.Solving for the price yields p = 21.15/1.1 = 19.23.Tax revenue equals (21.15 - 19.23)∗ 57.69.