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Consider an example of the vehicle tires; if the supply and demand are:

Qs = – 500 + 8p ;  Qd = 500 –2 p

Solve:

  1. Equilibrium price and equilibrium quantity and calculate total revenue?
  2. If there were a price ceiling equal to 120 SAR per each tire imposed, calculate the price elasticity of demand? Does this consider elastic, inelastic or unit elastic?  Also, calculate the total revenue?
  3. Now consider the vehicle battery; if the supply and demand is:

                                         i.            Qs = – 100 + 3p ; Qd = 1100 – 9p, calculate the equilibrium price and equilibrium quantity.  Also, calculate Total Revenue.

  1. If there were a price ceiling of 120 SAR imposed per each pair of battery, calculate the price elasticity of demand? Do the battery product consider elastic, inelastic or inelastic or unit elastic? Also calculate total revenue.
  2. Compare the total revenue for the tires and the total revenue you found for the battery.  Which one of product’s total revenue has been increased after the price have been increase and why?  Explain in words and show the difference in numbers as well.
  3. Recall part a (The tires) Calculate the CS & PS. Hint; you need to set Qs=0 & Qd=0 to find the intercept and calculate the CS, PS.  you need to set Qs=0 & Qd=0  then solve for P to find the intercept and calculate the CS, PS. Where the CS is the area between the intercept for demand and the equilibrium price you found on part a.  Do not forget that this area is a triangle so carefully calculate the area.  The same thing for PS.
  4. Now, if the government impose sales tax equal to 5%, what is the CS, PS, government revenue and DWL and show this on the graph?  Hint; price paid by the buyer equal 104 SAR and price received by seller equal 99 SAR, the difference is the tax per tires.  The intercept points for the supply and demand on this part are the same as the ones on part e. To find the quantity, plug either the price for the buyer on the demand curve formula or the price for the seller on supply curve formula.  Also, remember CS, PS & DWL have triangle area, whereas tax revenue has rectangular area.  Graph this manually so you can easily find the answer.

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