Question

kindly do it as written form on word

1 Market Equilibrium [60 marks] Suppose the demand and supply relations of wheat in an economy are given by:

D: Q = 1500 − 6P + aY   

S: Q = −270 + 9P

where Q denotes the quantity of wheat measured in million of bushels per year, P is the price of wheat measured in thousand of £ per million bushels; Y is average income measured in thousand £ per year.

1. Let a = 0. Consider the introduction of a tax. Let P denote net price. Illustrate on the same figure1 the market equilibria in three scenarios:

(a) no tax

(b) lump sum tax that equals £500 per million bushells

(c) proportional tax that is designed such that at the market equilibrium the per unit tax revenue generated equals £500 per million bushells.

Use Solver to compute the market equilibria in all three scenarios. Comment on the changes to the supply and demand curve and equilibrium quantities and prices.[35 marks]

2. Let a = 0.1. Suppose that average income equals the sum of all digits in your student number (for example, for student number 123456789, Y = 45). Use Excel to draw a chart that illustrates the demand and supply relations and how these relations change if average income doubles. Use Solver to compute the exact values of equilibrium quantity and price in both cases, i.e. when income equals the sum of all digits in your student number and when income is double that amount. Comment on the changes to the supply and demand curve as a result of the doubling of income and the income effect on the equilibrium quantity and price.[25 marks]

Answer 1

Demand Supply Curve 300.00 250.00 Demand Curve 200.00 Supply Curve 150.00 100.00 50.00 0.00 200 400 600 800 1000 1200 1400 Quantity