Market Equilibrium and Taxes

Market Equilibrium and Taxes

  1. Analyze what would happen to equilibrium price and quantity in the market for Pepsi if the following occurred.  Briefly explain your answers.
  1. The price of Coke decreases.

Coke and Pepsi are substitute products (Besanko, Braeutigam & Gibbs, 2011). When the price of coke decreases, its consumers will demand more. Coke will substitute Pepsi for the new equilibrium point. The demand for Coke will increase. On the other hand, the quantity demanded for Pepsi will decrease because the product is very expensive. Therefore, the equilibrium price and quantity for the market of Pepsi will fall.

  1. Average household income falls from $50,000 to $43,000.

When the average incomes of households fall from $50,000 to $43,000, it means that they will have $7,000 less in their disposable income. Moreover, they will have less money to spend, and this will decrease the quantity demanded for Pepsi because they seem expensive to them.

  1. There are improvements in soft-drink bottling technology.

An improvement in soft-drink bottling technology means that the company will be able to produce Pepsi at a cheaper cost. They can sell Pepsi at a cheaper price and produce more. Therefore, the equilibrium price will reduce while the equilibrium quantity will increase.

  1. The price of sugar increases and the Pepsi launches an extremely successful advertising campaign.

If the price of sugar increases, the cost of producing Pepsi will increase and this will raise the price while the quantity demanded decreases. However, a successful advertising campaign will increase both the equilibrium price and equilibrium quantity for Pepsi market. The demand curve for Pepsi will shift to the right while the supply curve will shift to the left.


  1. Analyze the following demand and supply equations to answer the questions.


Demand Equation:  Qd = 100 – 4P

Supply Equation:  Qs = 10 + 6P


  1. What is the equilibrium price? What is the equilibrium quantity?

Hint: Equate Qd = Qs. Solve for the equilibrium price and then the quantity.

At equilibrium, the quantity demanded equals the quantity supplied.


100-4P = 10+6P

-4p-6P = -90

-10P=-90 therefore, P=9

Equilibrium price =9

100-4(9) = 64=Qd

The equilibrium quantity = 64

  1. Assume the government places a price ceiling at $7 in the market. What is quantity demanded? What is quantity supplied?  Is there a shortage or a surplus?

With the price ceiling of $7, sellers are restricted from charging a price above the one set by the government. Therefore, the prevailing market price will be $7. There will be shortage of the product.


Quantity demanded will be 100-4(7) = 72


Quantity supplied will be 10+6(7)= 52

  1. Using the diagram below, answer the following questions:





  1. How much is the per-unit (pack) tax on cigarettes?

Per unit tax = $5.50-$4.25= $1.25

  1. What price do consumers pay after the tax?

Consumers will pay= $5.50

  1. How much tax revenue is collected?

Tax revenue = per unit tax × quantity sold (Besanko, Braeutigam & Gibbs, 2011)

Tax revenue= $1.25×18 = $22.5 Billion

  1. What is the amount of deadweight loss after the tax is imposed on cigarettes?

Deadweight loss= ½(b×h)

½(5.50-4.25) × (20-18) = $1.25 Billion



Besanko, D., Braeutigam, R. R., & Gibbs, M. (2011). Microeconomics. Hoboken, NJ: John Wiley.



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