Suppose the economy has access to 1000 Mahogany trees, used for making guitars. Processing the trees...

Suppose the economy has access to 1000 Mahogany trees, used for making guitars. Processing the trees for guitar production costs $1 per tree. This economy may access 1000 additional trees (perhaps existing in the outskirts of the town) but it costs $3 to use each of those trees. Assume 5 trees are needed to produce one guitar. Questons : (1) What is the Supply curve for guitar production? You may answer with a fully labeled picture. (2) If the demand function for guitars is D(p)=220-2p, what is the equilibrium price and quantity in the market for guitars? Credit is based on the logic of your explanations, so explain your reasoning! (3) Suppose the government wants to incentivize people to play more guitar, so they place a subsidy of $5 per guitar. That is, if the consumer pays p, the firm gets p+5. Will the government achieve it's goal of having more guitars bought in equilibrium? Credit is based on the logic of your explanations, so explain your reasoning!

Expert Solution

Consider the images below for the solution with detailed reasoning. The firms supply curve will be a horizontal line with a kink at 200 level of quantity produced. First the equilibrium price and quantity will be 15 and 190 respectively, and after the subsidy will change to 10 and 200 respectively. The government will succed in increasing guitars bought in equilibrium.

Rahul Sunny answered 2 years ago

Suppose the economy has access to 1000 Mahogany trees, used for making guitars. Processing the trees...

Suppose the economy has access to 1000 Mahogany trees, used for making guitars. Processing the trees for guitar production costs $1 per tree. This economy may access 1000 additional trees (perhaps existing in the outskirts of the town) but it costs $3 to use each of those trees. Assume 5 trees are needed to produce one guitar. Questons : (1) What is the Supply curve for guitar production? You may answer with a fully labeled picture. (2) If the demand...

Suppose the economy has access to 1000 Mahogany trees, used for making guitars. Processing the trees...

Suppose the economy has access to 1000 Mahogany trees, used for making guitars. Processing the trees for guitar production costs $1 per tree. This economy may access 1000 additional trees (perhaps existing in the outskirts of the town) but it costs $3 to use each of those trees. Assume 5 trees are needed to produce one guitar. Questions : (1) What is the Supply curve for guitar production? You may answer with a fully labeled picture. (2) If the demand...

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Suppose the economy has access to 1000 Mahogany trees, used for making guitars. Processing the trees...

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