Demand and supply functions

| January 28, 2015

Suppose the demand and supply functions of Chicago’s Bloom Chocolate factory are given as follows:Q = 5 + 2PQ = 15 – 3PA) Indicate which of the equations above is the supply function, and which is the demand function. Justify your answer and show the demand and supply functions on a graph. Carefully label the axis. (2 points)
B) Find the equilibrium price and quantity. (3 points)
C) Assume the price level falls 10% below the equilibrium price, derive the point price elasticities of demand and supply. Is the demand for chocolate elastic, inelastic, or unit elastic? How about the supply? (6 points)
D) Now, suppose that an excise tax is imposed on chocolate. Would the burden of the tax fall mostly on consumers, mostly on producers, and approximately equally, or is it impossible to tell? Explain.

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