1. Suppose that many cities begin to pass taxes on carbonated sodas, while at the same...

1. Suppose that many cities begin to pass taxes on carbonated sodas, while at the same time scientists discover a cure for citrus greening, which is reducing orange crops in Florida and Brazil. Use a demand and supply graph to illustrate your answers to the following questions.

a) Can we use this information to be certain whether the equilibrium price of orange juice will increase or decrease?

b) Can we use this information to be certain whether the equilibrium quantity of orange juice will increase or decrease?

2. Graph the market and find the equilibrium price and quantity where:

- Demand given as P=15-2Q

- Supply if given as P=Q

Expert Solution

(1)

A tax on soda will decrease the effective price received by soda producers, so they will decrease production which will decrease its supply. Hence price of soda will increase. Since soda and orange juice are substitutes, higher price of soda will increase the demand for orange juice, shifting its demand curve rightward which will increase price and increase quantity of orange juice.

At the same time, technology advancement will increase orange harvest, shifting the supply curve for oranges rightward, which will decrease the price of oranges. Since oranges are input to orange juice production, lower price of oranges will lower input cost of orange juice and producers of orange juice will increase production. Supply of orange juice will increase, shifting its supply curve rightward, which will decrease price and increase quantity.

(a) The net effect on price is uncertain. Price will increase, decrease or remain unchanged on basis of whether the rightward shift in demand curve is higher than, lower than or equal in magnitude to the rightward shift in supply curve.

(b) The net effect on quantity is a definite increase.

In following graph, D0 and S0 are initial demand and supply curves of orange juice, intersecting at point A with initial price P0 and initial quantity Q0. As D0 shifts right to D1 and S0 shifts right to S1, they intersect at point B with higher price P1 (since rightward shift in demand is higher than rightward shift in supply) and higher quantity Q1.

NOTE: As per Answering Policy, 1st question is answered.

Rahul Sunny answered 2 years ago

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