Question

In Afghanistan, coffee is illegal, so people sell coffee beans on the black market. The demand for coffee beans (Y) is Y_D = 24 – P and the supply for coffee beans is Y_S = 4P.

1. Estimate the equilibrium price and quantity in the black market. Use a graph to support your answer.

This is a basic algebra equation (solve for P) P=price.

If you remember from your chapter 4 reading: Yd=Ys

24-P=4P
24=4P+P
24=5P
P=24/5
P=4.8

Once we solve for P, then we just insert 4.8 for P

Yd=24-4.8

Yd= 19.2

Ys=4P

Ys= 4 * 4.8

Ys= 19.2

Equilibrium price is 4.8,

Quantity is 19.2

2. The government becomes aware of the black market and increases the efforts to curtail coffee bean distribution on the black market. As a result, half the coffee bean supply is seized. Using a graph, explain the change to supply and demand.

3. Suppose the Afghanistan government legalizes coffee in the country. Now, coffee beans are traded on the open market. However, for every pound of coffee beans purchased, the government charges a tax (T) to consumers. The tax is equal to the pre-tax price (P). Using a graph, explain the change to supply and demand. What is the (approximate) after tax price paid by consumers?

Answer 1