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1. Suppose that the US demand for aluminum is given by
QD = 500 – 50 P + 10 Y
Where P = Price of aluminum per ton
Y = average income (in 1000’s per year)
And the US supply of aluminum is given by
QS = 50 P – 200PB
Where PB = Price of bauxite (raw material from which aluminum is extracted) per ton
a. If Y = 10 and PB = 2, what is the equilibrium price and quantity of aluminum?
b. (1). Solve for the equilibrium price of aluminum as a function of income.
(2). If Y = 10, what is the equilibrium price of aluminum? (Use the equation solved for in (1).
c. Given that Y = 10 and PB = 2, calculate the price elasticity of demand and the price elasticity of supply.
d .Suppose the government places a $1/ton specific tax on aluminum.
i. Calculate the new equilibrium price and quantity for the aluminum market.
ii. How much of the tax has been passed on to the consumer?
iii. Verify your answer in (ii) using the calculus approach from the text for solving for the burden of the tax.
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