The following are the demand and supply function for beer. Qd = 25 - P

Intermediate Microeconomics

The following are the demand and supply function for beer.

Qd = 25 - P

Qs = -20 + 4P (P = price/barrel).

(a) What are the equilibrium price and quantity?

(b) Is the demand for beer ‘elastic’ or ‘inelastic’? (Hint: Compute price elasticity of demand at equilibrium!)

(c) Suppose a price ceiling is imposed by the government at $8.00/barrel.

(i) What is the new quantity sold? (ii) Is there a ‘shortage’ or ‘surplus’ in this market? How much is the ‘shortage’ or ‘surplus’?

(d) If the government imposes an excise tax of $4.00/barrel on beer,

(i) What is the effect of the excise tax? (Hint: Compute the new equilibrium price and quantity.)

(ii) How much tax revenue does the government collect?

Expert Solution

Rahul Sunny answered 2 years ago

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