Market For Lobster – Revisited Again (40 Points) Consider Ag

Market for lobster –Revisited Again (40 points) Consider again the market for Atlantic lobster presented in Q#1 of the previous assignments in the case where government imposed an excise tax that is officially paid by the fishing industry.

The assignment involves analyzing the lobster market with a focus on demand and supply dynamics, especially under government intervention through taxes. It requires reconstructing the market equilibrium, illustrating tax incidence, calculating elasticities, and interpreting their implications. Additionally, the assignment extends into demand analysis for different individuals, understanding shifts in demand curves, cross-price elasticities, and their economic interpretations.

Paper For Above instruction

The Atlantic lobster market provides an insightful example of how market forces and government interventions influence prices, quantities, and the distribution of tax burdens. In the absence of intervention, the market price (P) and quantity (Q) are determined by the intersection of the demand and supply curves, which must be reconstructed graphically based on given or assumed data. Typically, the demand curve is downward sloping, reflecting an inverse relationship between price and quantity demanded, whereas the supply curve slopes upward, indicating higher prices incentivize greater production. Without specific numerical data, we assume plausible demand and supply functions that can be scaled to fit empirical data, allowing for a clear graphical depiction of the equilibrium point—where the quantity demanded equals the quantity supplied.

Introducing an excise tax levied on the fishing industry shifts the supply curve upward (or inward), representing increased costs of production. Graphically, this results in a new equilibrium with a higher market price (P_tax) and a lower quantity (Q_tax) compared to the original equilibrium. The tax incidence—the division of tax burden—can be visually represented by the difference between the tax-inclusive and original supply curves, highlighting the portions paid by consumers and producers. Under typical conditions, the party with the less elastic curve bears a larger share of the tax burden, since less elastic demand or supply indicates a lesser response to price changes, conferring more market power to the less elastic side.

Calculating price elasticities involves using the standard (non-midpoint) formula, which measures the responsiveness of quantity demanded or supplied to price changes. The price elasticity of demand (ε_d) quantifies consumer responsiveness: if demand is elastic, a small price change results in a larger quantity change; if inelastic, quantity demanded is relatively insensitive to price changes. Similarly, the price elasticity of supply (ε_s) indicates how responsive producers are to price fluctuations. Typically, demand for essential goods like lobster is relatively inelastic in the short term due to limited substitutes, but may become more elastic over time. Supply elasticity depends on factors such as fishing technology and resource constraints.

Determining whether demand or supply is elastic or inelastic at the relevant price point helps explain the distribution of the tax burden. If demand is inelastic relative to supply, consumers bear a larger portion of the tax, as producers can pass more of the tax onto consumers without a significant decrease in quantity demanded. Conversely, if demand is elastic and supply is inelastic, producers absorb more of the tax burden, since passing it onto consumers would significantly reduce sales. Understanding these elasticities provides critical insight into market responses and the economic welfare implications of taxation.

Analysis of demand curves for individuals shows varying degrees of responsiveness to price changes. For instance, individuals who would never buy a Britney Spears CD regardless of price demonstrate entirely inelastic demand—horizontal demand curve at zero quantity. Conversely, someone who loves coffee and would buy out the entire stock at a certain low price exhibits extremely elastic demand, potentially approaching a perfectly elastic demand curve at that particular price point. Such variations highlight the importance of understanding consumer preferences and substitutes in determining demand elasticity.

Supply shifts also influence market equilibrium, as seen in scenarios like illegal drug markets or stadium construction. A supply curve shift in an inelastic region results primarily in significant price changes with minimal quantity variation, whereas shifts in elastic regions lead to substantial changes in quantity with minor price adjustments. For illegal drugs entering Canada, increased supply in a relatively elastic region would likely reduce prices but may not significantly increase quantity due to demand constraints. In contrast, increased stadium capacity during a period of elastic demand may substantially alter total revenue, with the supply shift affecting the quantity sold more than the price.

The cross-price elasticity of demand measures how the quantity demanded of one good responds to the price change of another. A negative cross elasticity (e.g., air conditioning units and electricity) indicates complementary goods, whereas a positive value (e.g., Coke and Pepsi) signifies substitutes. The magnitude of the elasticity reflects the strength of this relationship; for example, a high positive elasticity for butter and margarine suggests perfect substitutes, with consumers switching between them readily when prices change. The comparison of elasticity magnitudes helps to infer the degree of substitutability or complementarity, guiding businesses and policymakers on pricing strategies and tax impacts.

Using the given data, a 5% increase in the price of Pepsi would lead to a proportional change in Coke demand. For substitutes like Coke and Pepsi with a cross elasticity of +0.63, the change in Coke demand due to a 5% increase in Pepsi’s price is calculated as 0.63 × 5% = 3.15%. Similarly, a 10% fall in gasoline prices would increase SUV demand by 0.28 × 10% = 2.8%. These calculations quantify the sensitivity of goods to related price changes, emphasizing how cross-elasticities influence market dynamics and consumer choices.

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