Analysis of shifts in demand curves

In 2005, APEX received a tax credit for production of its solar panels through the US Department of Energy’s Energy Efficiency and Renewable Energy (EERE) procurement plan. The credit allowed APEX to reduce the selling price of its panels by 15 percent. In response to this discounted price, APEX experienced a 20 percent increase in the number of solar panels sold for home construction during the first 12 months following this price reduction. Over time, home builders found that, not only were the solar panels a cost-effective source of residential energy supply, but they also were an added plus in marketing for today’s environmentally conscious customers.

The Department of Energy is considering diverting funds from the solar panel subsidy in order to provide more financial support for alternative energy research. The CFO has asked your team to make a projection of how APEX’s sales volume might be affected if in fact this tax credit is repealed and solar panel prices rise by 15 percent this year. Is it reasonable to think that APEX will experience a 20 percent drop in the number of solar panels sold? Or, could you argue that the drop in sales might be something less or something more than this? Use economic reasoning to justify your forecast.

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