Question

1. The supply and demand of desk fans are given by the two functions below. Prices are expressed in UK Pounds (£):

D: Q = 120- 2P

S: P = -20 + 1.5Q

a) Calculate the equilibrium price (P*) and Quantity (Q*). [4 Marks]

b) Find the PED at this equilibrium level. [2 Marks]

The Government are concerned about bulk buying or fans in hot weather and so decide to impose a tax on this product. This means that supply is now given by P = -20 + 3.5Q c)

C) Calculate the change in Consumer Surplus as a consequence of this taxation. [5 Marks]

d) Sketch out the two new equilibrium points (before and after taxation). [4 Marks]

Answer 1

$$Q_d=Q_s$$

$$120-2p=-20+1.5p$$

$$p*=40$$

$$Q*=40$$

$$P_{ED}=-2\times \frac{40}{40}=-2$$

$$Q_S^/=\frac{2}{7}p+\frac{40}{7}$$