1.

Assume that peanut butter and jelly are complementary goods. The government begins to tax the production of peanuts and input into peanut butter.

(a)

For each of the following markets, draw a correctly labeled supply and demand graph and show the effect of the tax on the equilibrium price and quantity in the short run.

(i)The peanut market

(ii)The peanut butter market

(iii)The jelly market

(b)

If the demand for peanut butter is price inelastic, how will total revenues for the peanut butter producers change as a result of the governmental tax?

2.

The table below gives the quantity of good X demanded and supplied at various prices.

Price (dollars) Quantity Demanded Quantity Supplied

30 1 3

20 3 3

10 4 3

(i) Is the demand for good X relatively elastic, relatively inelastic, unit elastic, perfectly elastic, or perfectly inelastic when the price decreases from $30 to $20? Explain.

(ii) Is the supply of good X relatively elastic, relatively inelastic, unit elastic, perfectly elastic, or perfectly inelastic when the price decreases from $30 to $20? Explain.

(b) Assume that the income elasticity of demand for good Y is -2. Using a correctly labeled graph of the market for good Y, show the effect of a significant increase in income on the equilibrium price of good Y in the short run.