Question

Your job in this question is to be a supply analyst. Do some research on your own to determine the price and nonprice determinants of the supply of gasoline. Be sure to develop a general functional form supply equation that is “signed,” and be sure to explain the signs. Suppose you estimate the supply equation, and the supply equation is Qs = 20 +2*P, interpret the slope and intercept, and explain how NPDs are somehow implied in this supply schedule. Suppose tariffs, a tax on imported goods, increase the cost of importing of gasoline, use words, math and a graph to illustrate how the supply of the gasoline changes.

Answer 1

The supply equation is given by Qs = 20+2*P and in this equation 20 is the intercept term and slope is 2. It means the quantity Supply is minimum 20 which does not depend on price. It means if the price is zero there will be at least supply of 20. The slope term 2 represent the change in quantity supplied will be double corresponding to change in price. The non price determinant are 20 and the slope term 2 represent how the quantity supply will response with respect to change in price. Both the term 20 and 2 exogenously fixed and these are non price determinant which are included in this supply function.

Now if tariff or tax is imposed on supply then the cost of supply of gasoline will increase. Let suppose $t tax is imposed on this supply and the supply schedule will be changed by this tax. Supply will be fall by this fixed amount of tax multiplied by 2. Therefore Qs= 20+2P, or 2P = Qs -20, or P = 1/2* Qs - 10. If per unit tax is $5 then the supply schedule is P = (1/2)*Qs - 10 +5 = (1/2)*Qs - 5 , or Qs = 10+2P, therefore due to tax supply fall by 10 for every unit of price. It shows that if $5 tax is imposed supply will be fall by 10 units. Because supply will be Qs = 20 + 2(P- tax) = Qs = 20 + 2(P - 5) = 20 + 2P - 10 = 10 +2P. We can draw this supply schedule as follows-