Question

\Assignment Week 4 Suppose a product has supply function P = 0,08Q + 50 and demand function P = -0,07Q+ 65. According the tax law the products is subject to tax Rp1,5 per unit please answer the following questions 1. Find the equilibrium of the price (?) and units (Q) before taxed. 2. Find the equilibrium of the price (P) and units (Q) after taxed. 3. Draw the equilibrium curve before and after taxes.

Answer 1

1. Equililbrium means that suplly function equals demand function.

i.e. 0.08Q + 50 = -0.07Q + 65

or 0.15Q= 15

or Q = 100

Now we know P = 0.08 Q + 50. Substituting Q here with 100, we get P = 0.08(100) +50

So, P = 8 + 50 = 58

Hence equilibrium price is 58 and equilibrium quantity is 100

2.  No we are given a tax of 1.50. Hence supply functiton will become P = 0.08 Q + 50 + (1.50)

i.e. Price = 0.08 Q +51.50

Demand function will remain the same of P = -0.07Q + 65

Now, 0.08 Q + 50 + (1.50) = 0.07Q + 65 for equilibrium ocndition

Solving this the same way as above we get Q = 90 and substituting it in supply function,

we get P = 0.08(90) + 51.50

Hence P = 58.70

Thus equilibrium price is 58.70 and equilibrium quantity is 90.

3. Equilibrium before tax

-100 Price -90 -80 Fo -60 50 -40 -30 -20 -10 Quantity -50 1.00_150_200_250_300_350_400_450_500.

Equilibrium after tax

Orange is demand and blue is supply

-100 Price -90 -80 Fo -60 -40 -30 -20 -10 Quantity -50 1.00_150_200_250_300_350_400_450_500.

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