Question

Good $\mathbf{X}$ is produced in a competitive market using input A. Explain what would happen to the supply of good $\mathbf{X}$in each of the following situations:

a. The price of input A decreases.

b. An excise tax of$\mathbf{\backslash (}\mathbf{3}$is imposed on good$\mathbf{X}$.

c. An ad valorem tax of$\mathbf{\backslash )}\mathbf{7}$percent is imposed on good$\mathbf{X}$.

d. A technological change reduces the cost of producing additional units of good$\mathbf{X}$.

Short answer

1. The supply of Good$\mathrm{X}$ will increase, as the cost of manufacturing the product will be lower
2. The cost of producing the product rises, the supply of good $\mathrm{X}$decreases.
3. Raising the kind of tax will reduce the supply of good$\mathrm{X}$ .
4. The supply of Good$\mathrm{X}$ will increase

Step-by-step solution

Given Information

Good $\mathrm{X}$is manufactured using input A in a competitive market. A reduction in the cost of input A Good $\mathrm{X}$is subjected to an exercise tax. Good$\mathrm{X}$ is subject to an ad valorem tax, the cost of creating additional units of Good$\mathrm{X}$ decreases because of technical advancements.

To find the supply of Good in first situation:

a.

The price of an input plays a significant effect in the supply of a good. As input prices rise, supply falls, forcing the producer to spend more money on materials for the product to be manufactured. In our example, the input price A falls. As a result, the supply of Good$\mathrm{X}$ will increase, as the cost of manufacturing the product will be lower than earlier.

To find the supply of Good in second situation:

b.

If an excise tax is levied on the homogenous product, the cost of production of the product rises and the supply of good $\mathrm{X}$decreases.

To find the supply of Good in third situation:

c.

When the product is subject to an ad valorem tax, raising the kind of tax will reduce the supply of good $\mathrm{X}$.

To find the supply of Good in fourth situation:

d.

Reducing the cost of creating the product will benefit the producer because the cost of producing the product will be lower. As a result, the supply of Good $\mathrm{X}$will increase.