Question

Question 2

The market for olive oil is perfectly competitive: so that every producer and consumer is a price-taker.

1. (a) Give an example of a market event that would mainly increase the supply of olive oil.
   If this event happens, holding all else equal, what happens to equilibrium price and quantity of olive oil?
   What happens to total revenue earned by olive oil producers?

2. (b) Suppose the public learns that other types of cooking oil significantly increase the risk of heart disease, so olive oil is the healthier alternative. What is likely to happen to:
   . . . the demand for olive oil?
   . . . the price elasticity of demand for olive oil?

   Explain these answers.

Consider a different market - that for corn oil. The demand for corn oil is perfectly elastic. The supply of corn oil is neither perfectly inelastic nor perfectly elastic.

(c) Draw a demand and supply diagram that shows this market

4. (d) On a supply and demand diagram, show the impact of a tax on corn oil producers. Your diagram

   should at least be labelled with Q∗ (quantity when no tax) and QT (quantity with a tax).

5. (e) You should see that one side of the market is paying all of the tax (i.e. tax incidence is 100%). Is this

   the consumers or the producers?

Answer 1