Question

In 2019 the per head consumption of chicken meat in country X was 40 kg whereas the price per kilo was €5. The price elasticity of demand was -1 whereas the price elasticity of supply was 0.5. Given the information provided, and assuming linear demand and supply curves, find: a) The demand and supply curve equations [Mark: 1.0] b) The effect on market equilibrium price and quantity if the government imposes a tax of €0.6 per kg Assume that the producers collect the tax on behalf of the state [Mark: 1.0] c) The effect of the tax imposition on consumer welfare [Mark: 0.5]

Answer 1

Given : Q = 40 P = 5 Elasticity of demand = -1 and Elasticity of supply = 0.5

a. Elasticity = 1/slope

Hence Slope of the demand curve = 1/ed = -1

Demand Equation = Qd = a - P, where a is the quantity demanded when P = 0

Similarly Slope of Supply = 1/es =1/0.5 = 2

Supply Equation = Qs = w + 2P, where w is the quantity supplied when price = 0

b. When the government imposes taxes on the goods, the supply curve will shift to the left as the production of goods will become more costly than before, hence the producers will be able to supply lesser quantities at the given price level. Since the Elasticity of Demand > Elasticity of supply, the incidence of tax will fall more on the consumers. market equilibrium price will increase and the equilibrium quantity will decrease due to imposition of taxes

c. Since the imposition of taxes by the government will increase the equilibrium price in the market, the consumers will be able to purchase the each quantity of goods at a higher price. Also, due to relatively higher level of elasticity than the elasticity of supply, the incidence of taxes will fall more on the consumers. This will result in decrease in the consumer surplus as a result of which the consumer welfare will decline.

C.