Consider an example of the TV market; if the supply and demand curves represented as:
Qs = -500 + 2p ; Qd = 2500 – p
- Equilibrium price and equilibrium quantity and calculate total revenue?
- If there were a price celling equal to 1200 SAR per each TV imposed, calculate the price elasticity of demand? Does this consider elastic, inelastic or unit elastic? Also, calculate the total revenue?
- Now consider the Personal Computer (PC); if the supply and demand is:
- i. Qs = -1000 + p ; Qd = 9000 – 4p, calculate the equilibrium price and equilibrium quantity. Also, calculate Total Revenue.
- If there were a price celling of 2,100 SAR imposed per each PC, calculate the price elasticity of demand? Do the shoes consider elastic, inelastic or unit elastic? Also calculate total revenue. Hint; plug the new price on the demand curve formula, then find the new quantity demand after change in prices, after that solve for the elasticity by comparing the percentage changes in P & Qd.
- Compare the total revenue for the TVs and the total revenue you found on the PCs. Which one of product’s total revenue has been increased after the price have been increase and why? Explain in words and show the difference in numbers as well.
- Recall part a (the TV) Calculate the CS & PS and total surplus. Hint; you need to set Qs=0 & Qd=0 then solve for P to find the intercept and calculate the CS, PS. Where the CS is the area between the intercept for demand and the equilibrium price you found on part a. Do not forget that this area is a triangle so carefully calculate the area. The same thing for PS.
- Now, if the government impose sales tax equal to 22.5%, what is the CS, PS, government revenue and DWL? Hint; price paid by the buyer equal 1150 SAR and price received by seller equal 925 SAR, the difference is the tax per TV. The intercept points for the supply and demand on this part are the same as the ones on part e. To find the quantity, plug either the price for the buyer on the demand curve formula or the price for the seller on supply curve formula. Also, remember CS, PS & DWL have triangle area, whereas tax revenue has rectangular area. Graph this manually so you can easily find the answer.
- Without calculation, would you expect to have higher/ lower government revenue and DWL on PCs why? This question could be answered in one or two sentences.