Question

Tax Problem:
Suppose the demand curve for a good is given by Q D = 10 - 2P and the supply curve is given by
Q S = -2 + P.

a) (4 points) Find the equilibrium price and quantity in the absence of any government intervention.
b) (6 points) Now suppose the government imposes a tax of t = 3. Find the new equilibrium price at
which the good is sold in the market and the quantity of the good sold. What is the net price (net
of taxes) that sellers receive?
c) (5 points) How much of the burden of the tax is borne by the buyers and how much is borne by
the sellers? Why is the burden of the tax asymmetric? (In the sense that one party bears more of
the burden)

Question #5 (15 points) Tax Problem: Suppose the demand curve for a good is given by Q QS- 2P. - 10-2P and the supply curve is given by a) (4 points) Find the equilibrium price and quantity in the absence of any government intervention. b) (6 points) Now suppose the government imposes a tax oft-3. Find the new equilibrium price at which the good is sold in the market and the quantity of the good sold. What is the net price (net of taxes) that sellers receive? c) (5 points) How much of the burden of the tax is borne by the buyers and how much is borne by the sellers? Why is the burden of the tax asymmetric? (In the sense that one party bears more of the burden)

Answer 1

Q_D = 10 - 2p Q_s = -2 + p Equilibrium Q_D = Q_S 10 - 2P = -2 + p 12 = 3P p = 4 & Q = 2 when g_out imposes a $3 tax P_B = P_s + 3 Q�_D = 10 - 2 P_B = 10 - 2 (P_s + 3) = 4 - 2P_5 Q_s = -2 + p = -2 + p_s eq^m Q�_D = Q_s 4 - 2 P_s = -2 + P_s 6 = 4 P_s P_s = 1.5 & P_B = 4.5 Buyer burden = 0.5 seller burden = 2.5 Burden of tax is asymmetric because of different elasticity of supply & demand Higher the elasticity lower will be the burden.