The current price of valves is $550 and the market for valves is in equilibrium at 20,000
Question:
The current price of valves is $550 and the market for valves is in equilibrium at 20,000 units per year.
There are no market distortions in this market. The market for valves is represented by a normal downward sloping demand curve and a normal upward sloping supply curve. The new manufacturing plant will produce 5,000 valves and this extra supply will decrease the price to $500 per valve. Because the supply curve is upward sloping, this new project is expected to displace existing producers by 3,000 units (valves per year)
a) Using a diagram, show the equilibrium price and quantity before and after the project. On your graph, show the number of displaced producers. (Be sure to label your graph completely and with proper headings)
b) Given the information above, calculate the price elasticity of demand and the price elasticity of supply? (Using the point formula)
c) Is demand and supply, elastic, inelastic or unit elastic? Explain.
d) Using Harberger’s price elasticity formula, calculate the benefit per unit as a result of this project. Show work
e) From a financial analysis, what are the total benefits (revenue) from this project? f) From an economic (social) analysis, what are the total benefits (revenue) from this project?
