Question

1. The market for a product has inverse demand and supply functions given by p=290 - 20, and p = 10 + 1.5Q, e. Suppose the state government levies a tax of $45 on each unit sold, imposed on the sellers. Draw the new Supply curve on (c) and label it S2. Write out the new Supply equation and find the new after-tax equilibrium quantity traded in the market. What is the price that consumers pay on the market (Pc). What is the price producers receive (Ps)? Label both in (c). (12pts) f. As a percentage of the total tax, what is the incidence of the tax on buyers? What is the (percent) tax incidence on sellers? (5pts) g. Without calculating the respective elasticities, which party, buyers or sellers, is less price sensitive (curve is more inelastic). How do you know? (3pts) h. Calculate the tax revenue earned. (3pts)

Answer 1

E. New Supply Equation

S2

p=10+45+1.5Qs=55+1.5Qs

New after tax Equilibrium-

55+1.5Q=290-2Q

Q*=67.1

Price paid by consumers= $155.7

Price received by sellers=$110.7

Price Demand 100 150 Quantity

f. Tax paid by consumers= $155.7-$130=$25.7

Consumers share= $(25.7/45)*100=57.1%

Tax paid by producers=$130-$110.7=$19.3

Producers share =$(19.3/45)*100=42.9%

g. Consumers are less sensitive as they pay higher share of tax. Consumers are more inelastic than producers.

h. Tax revenue= Tax* quantity= $45*67.1= $3019.5