(a) Find the equilibrium price and quantity.

At equilibrium point q^D = q^S

1000 – p = 700 + 2p

300 = 3p

p = 100

Therefore, equilibrium price is Rs 100

q^D = 1,000 – p

= 1000 – 100

= 900 units

Therefore, equilibrium quantity is 900 units

(b) Now suppose that the price of an input used to produce salt has increased so that the new supply curve is

q^S = 400 + 2p

How does the equilibrium price and quantity change? Does the change conform to your expectation?

Now for equilibrium price

1000 – p = 400 + 2p

600 = 3p

p = 200

Therefore, equilibrium price is Rs 100

q^s = 400 + 2p

= 800

Therefore, equilibrium quantity is 800 units

The equilibrium quantity has decreased because the cost of production has increased which will shift the marginal cost curve leftward and move the supply curve towards the left, the leftward shift in the supply curve will result in increase in equilibrium price and fall in equilibrium quantity.

(c) Suppose the government has imposed a tax of Rs 3 per unit of sale of salt. How does it affect the equilibrium price and quantity?

The imposition of tax of Rs 3 per unit of salt sold will raise the cost of producing salt. This

will shift the supply curve leftwards and the quantity supplied equation will become

q^s= 700 + 2 (p - 3)

At equilibrium point q^D = q^S

1000 – p = 700 + 2 (p – 3)

1000 – p = 700 + 2p - 6

1000 – 694 = 3p

p = 102

Therefore, equilibrium price is Rs 102

q^d = 1000 – p

= 1000 – 102

= 898

Therefore, equilibrium quantity is 898 units