Supply, Demand, Government Policies: Numerical Questions

1. Consider the following demand and supply functions for a household product:

Demand function: Qd = 500-4P ; Supply function: Qs = -100+2P

If the quantity demanded and quantity supplied are measured in thousands of kilograms
and the price is measured in Rupees,

a. Find the equilibrium price and quantity for this product.

b. If the government imposes Rs 6 per unit tax on the buyers of this product, what will be
the final price that buyers pay and sellers receive?

c. Have the consumer and producer surpluses increased or decreased after the tax is
imposed on this product? By how much?

d. What is the total tax revenue of the government?

e. Calculate the deadweight loss incurred due to the imposition of tax.

2. The demand and supply functions of a particular product are given below:

Demand function: Qd = 380-20P ; Supply function: Qs = -120+30P

You are required to answer the following questions:

a. Find the equilibrium price and quantity for this product.

b. If the government imposes Rs 4 per unit tax on the buyers of this product, what will be
the final price that buyers pay and sellers receive?

c. Has the total surplus increased or decreased as a result of imposition of tax by the
government? By how much?

d. What is the tax revenue generated by the government?

e. Calculate the amount of deadweight loss incurred due to the imposition of tax.

3. Consider the following demand and supply functions for an agricultural product:

Demand function: Qd = 16-10P ; Supply function: Qs = -8+20P

Where, the quantities demanded and the quantities supplied of the product are measured
in thousands of kilograms and the price is measured in Rupees.

If the government provides Rs 0.6 per kg direct subsidy to sellers of this product, how will it
affect the prices that buyers pay and sellers receive in this market? How is the benefit of
subsidy distributed among the buyers and sellers? How much money does the government
have to spend to fund this subsidy?

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4. The demand and supply curves of certain type of grain are depicted by the following
equations

Qd =500-25P and Qs = -250+25P

The government announces a program to support a price increase of Rs 2.50 per kg of this
grain, which imposes a price floor of Rs 17.50.

a. What are the equilibrium price and quantity of grain before price support policy?

b. What quantity of grain is purchased by the consumers, supplied by the producers and
purchased by the government at the support price?

c. What is the change in consumer surplus, producer surplus and total surplus? What is the
cost of government to implement this price support policy?

d. Research by Agro Institute suggests that the farm subsidies are better than the price
support policy, so the government changes the price support policy and provides subsidy of
Rs 1.50 per kg sold. What is the price paid by buyers, price received by sellers, change in
consumer surplus, change in producer surplus and government cost? Why subsidy policy is
better than the support policy?

5. Suppose the supply and demand equations for the market of textbooks are

Qd= 200-3P and Qs= -10+50P

a. Solve for the equilibrium price and quantity.

b. Suppose that the government passes a law saying that book sellers must pay a $3 tax on
each text book. What happens to the sticker price of the books? What is the market
quantity?

c. Suppose that the government passes a law saying that book buyers must pay $3 sales tax
on each book. What happens to the sticker price of the books? What is the market quantity?

d. How much revenue does the government collect from tax?

e. Using Supply and Demand diagram, shade the government total tax revenue. Then use a
different kind of shading to indicate the deadweight loss caused by tax.

6. The demand and supply equations for a product are given by

Demand function: Qd = 100 - 10P ; Supply function: Qs = 50 + 10P

If government provides subsidy of Re 1 per unit to sellers, what are the final prices paid by
buyers and received by sellers? How are the benefits of subsidy distributed among these
economic agents? What is the cost of subsidy to government?

7. The demand and supply functions for a particular product in the market are as follows:

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Demand function: Qd = 600 – 20P ; Supply function: Qs = - 300 + 10P

Where,

Qd and Qs are quantity demanded and quantity supplied in thousands of kgs , and price(P) is
in $ per kg.

The government imposes tax of $5 per kg on sellers of this product.

Requirements:

a. Find the equilibrium price and quantity before tax.

b. What are the prices that buyers pay and sellers receive after the imposition of tax?

c. How is the burden of tax distributed among buyers and sellers?

d. Compute the change in consumer and producer surpluses.

d. Calculate the amount of tax revenue generated by the government.

e. Compute the amount of deadweight loss as a result of imposition of tax.

8. The demand and supply functions for a particular product in the market are as follows:

Demand function: Qd = 4000 – 20P ; Supply function: Qs = - 800 + 10P

Where,

Qd and Qs are quantity demanded and quantity supplied in thousands of kgs , and price(P) is
in $ per kg.

a. Find the equilibrium price, quantity and total revenue for this market.

b. The government imposed per kg tax on sellers to this market as a result of which the
market supply function shifted to QS = -1100 + 10P. How has the shift changed the
equilibrium price and quantity in the market? How much tax was imposed by the
government?

c. What is the burden of tax on the buyers and sellers after the imposition of tax?

d. Calculate the amount of revenue generated by the government from tax.

e. How much is the deadweight loss in this market?

f. Will there be any change in the tax burden to the buyers and sellers if the same rate of per
kg tax is imposed on the buyers instead?

9. The demand and supply functions for a particular product in the market are as follows:

Demand function: Qd = 50000 – 40P

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Supply function: Qs = - 16000 + 20P

Where,

Qd and Qs are quantity demanded and quantity supplied in thousands of kgs , and price(P) is
in $ per kg.

Requirements:

a. Find the equilibrium price, quantity, consumer surplus, producer surplus and total
surplus.

b. Government is thinking over two alternative policies regarding the imposition of tax:

Policy 1: To impose tax of $150 per kg to sellers.

Policy 2: To impose tax of $150 per kg to buyers.

i. Compute the price paid by buyers, price received by sellers, tax revenue and deadweight
loss under policy 1.

ii. Compute the price paid by buyers, price received by sellers, tax revenue and deadweight
loss under policy 2.

iii. If you were an economic advisor, which policy would you recommend and why?

10. A government employee operates a coffee shop nearby his office. The demand and
supply function for coffee are Qd= 1600 – 100P and Qs = 800 + 100P. Initially there was no
tax so as to support small scale business but later on government changes its policy and
taxed the coffee shop Re. 1 per cup on sale. Find

a. Equilibrium price and quantity.

b. Price paid by buyers and price received by seller.

c. Share of tax burden on buyers and sellers.

d. consumer and producer surpluses.

e. Government revenue and deadweight loss.

Later on government changes the per unit tax policy to percentage tax and charged 25% tax
to the buyers. Find

a. Equilibrium price and quantity.

b. Price paid by buyers and price received by seller.

c. Share of tax burden on buyers and sellers.

d. Consumer and producer surpluses.

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e. Government revenue and deadweight loss.

Which policy either per unit or percentage tax is beneficial for the consumer, seller and the
government?

11. For a small economy, domestic demand and supply functions of sugar are given by

Qd = 4000 – 40P and QS = -1500 + 50P; quantities are measured in kg and price in Rs. per kg.

i. Assuming the closed economy, calculate price and quantity at equilibrium.

ii. Suppose the economy is open for foreign trade, and world price of sugar is Rs. 40 per kg.
Calculate domestic production, domestic demand and imports of sugar. Also compute C.S. ,
P.S. and total surplus.

iii. Suppose government imposes a tariff of Rs. 5 per kg on sugar. Calculate domestic
production, domestic demand and imports of sugar. Also compute C.S ,P.S. ,T.S. and tariff
revenue of the government. What is the amount of deadweight loss?

iv. Compare the results in parts (ii) and (iii).

12. Supply and demand functions for newly launched energy drink are as follows:

QS = - 120 + 3P and Qd = 480 – 2P

Price is measured in Rs.

a. Determine price and quantity at equilibrium, consumer surplus, producer surplus and
total surplus.

b. Government is thinking over two policies:

Policy 1: To provide subsidy of Rs. 20 per unit to seller.

Policy 2: To provide subsidy of Rs. 10 per unit to buyer.

i. Determine price paid by buyers, price received by sellers, cost of subsidy to government
and deadweight loss under policy 1.

ii. Determine price paid by buyers, price received by sellers, cost of subsidy to government
and deadweight loss under policy 2.

iii. Which policy will you recommend and why?

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