Impact of Tax on Consumption of Alcoholic Beverages

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A1a.The production possibility frontier (PPF) is drawn with cars on X axis and bicycles on Y axis. b.A production possibility frontier is defined as the locus of combination of two goods that can be produced in an economy with available resources and technology. ASSUMPTIONS: Resources like land, labour are fixed, in terms of their quantity and their productivity levelTechnology to produce cars and bicycles is same and unchanged for the purpose of data in this table. For any point on the production possibility frontier the technology used to produce the two goods remains unchanged. As per data given Newland can produce 30000 cars and zero bicycles OR 5000 bicycles and zero cars. It can also produce a combination of goods as given in the data. PROPERTIES: these relate to the shape of the production possibility frontier and the various points on the graph.A typical production possibility frontier is bow- shaped, which means it is concave to the origin. This shape is attributed to the concept of increasing opportunity costs. These costs refer to the
amounts of a good that have to be given up for an alternative good. To produce one more car we need resources. As all resources are used up we will have to pull out resources from bicycle production. The amount of pulled out resources is the opportunity cost of 1 car. Increasing opportunity costs means that to make more and more cars we need to free up an increasing amount of resources from bicycles. This means we have to give up on more and more bicycles. Any point inside the production possibility frontier shows that resources are unused. This is an inefficient point as resources are idle/ UNUTILISED.Any point outside the production possibility frontier is unachievable, though desirable. Given the resources and technology available such a point is unattainable.Any point on the curve is EFFCICIENT, as all resources are used. c.We need 1000 more bicycles and 2000 more cars as shown by point A.(3000 to 4000 bicycles and 18000 to 20000 cars). As per the data if Newland makes 4000 bicycles then it can make only10000 cars. It can’t make 20000 cars as required with the given resources and technology. A lies beyond the PPC. The requirement of increasing both cars and bicycles is not possible as the economy is already on the PPC- it is efficient. Unless the resources and/or technology improves we cant make more of both. This is possible if PPC shifts out by:1.An increase in resources.2.An efficiency improvement /productivity rise among resources.3.Trade with other economies can shift out PPC.
A 2:a.Revenue is defined as the product of price and quantity. As the table tells us when price equals \$400 the quantity demanded is 30 millions. Thus revenue = 30million*400 = \$12000000000 = 12 billion.When price equal \$350 the quantity demanded is 35 million. So revenue = 35million*350 = 12250000000 = 12.25 billion. Clearly revenue has risen by 0.25 billion increased. b.As per theory, there is direct relation between effect of price changes on revenues and price elasticity of demand. Revenues will rise when price rises if demand is inelastic, while inelastic demand cause revenues to fall. In our case when price rose from \$300 to \$350 the revenues rose by 0.25 billion. Thus, an increase in price is accompanied by rise in revenues, showing that demand is inelastic. We can show this with a decrease in price as well. If price were to fall to 250 then revenues = 250 million*45 = 11250000000 = 11.25 billion. Now revenue falls from 12 billion to 11.25 billion when price falls from \$300 to \$250. Thus, a fall in price caused a decrease in revenues confirming in elastic demand. PART IIQd= 100-5P Qs = 5P
c.Equilibrium is reached at the point where demand = supply. Qd=Qs100 – 5P = 5P100 =10PP= 100/10 = 10 Put this P value in Qd or QsPutting in Qs: Qs= equilibrium Q= 5*10=50d.Consumer surplus is the area under the demand curve and the equilibrium price.To get a point of price axis we put Q= 0 in Qd to get Qd= 0 = 100 -5PP= 100/5 =20Consumer surplus = area of orange triangle = ½ *50*(20-10) = 250To get a point of price axis we put Q= 0 in Qs to get Q = 0Producer surplus = area of blue triangle = ½ *50*10 = 250Total surplus = 250+250 = 500

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