Q1. (4 Points)
Consider an example of the Saudi clothing market; if the supply and demand represented as:
Qs = – 200 + 4p ; Qd = 800 – p
Solve:
- Equilibrium price and equilibrium quantity and calculate total revenue?
- If there were a price celling equal to 250 SAR per each cloth imposed, calculate the price elasticity of demand? Does this consider elastic, inelastic or unit elastic? Also, calculate the total revenue?
- Now consider the shoes market; if the supply and demand is:
i. Qs = -100 + 3p ; Qd = 800 – 6p, calculate the equilibrium price and equilibrium quantity. Also, calculate Total Revenue.
ii. If there were a price celling of 120 SAR imposed per each pair of shoes, calculate the price elasticity of demand? Does the shoes consider elastic, inelastic or inelastic or unit elastic? Also calculate total revenue. Hint; plug the new price on the demand curve formula, then find the new quantity demand after change in prices, after that solve for the elasticity by comparing the percentage changes in P & Qd
- Compare the total revenue for the clothing market and the total revenue you found on the clothing market. Which one of product’s total revenue has been increased after the price have been increase and why?
- Recall part a (the cloth market) Calculate the CS & PS. Hint; 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.
- Now, if the government impose sales tax equal to 12.5% on cloth, what is the CS, PS, government revenue, DWL and show this on the graph?Hint; price paid by the buyer equal 220 SAR and price received by seller equal 195 SAR, the difference is the tax per cloth. 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.
- Without calculation, would you expect to have higher/ lower government revenue and DWL on shoes and why?
Q2. ( 1 point)
Assume that Saudi Arabia produce only two products; Coffee bean and plastic where are the price and quantity produced are:
| Year | Coffee bean | Plastic | ||||
| 2018 (base year) |
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| 2019 |
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| 2020 |
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Calculate GDP deflator for the years 2018, 2019 and 2020. Also, calculate the Nominal and real GDP growth on 2019 & 2020, compare between them by explaining why they are different. Calculate the 2019 & 2020 inflation rates.
