Question

7.) Suppose demand and supply are given by Q = 7--P, and Q=-P, 4. a. Determine the equilibrium price and quantity. Show the equilibrium graphically. b. Suppose a $6 excise tax is imposed on the good. Determine the new equi- librium price and quantity. c. How much tax revenue does the government earn with the $6 tax? ond

Please show all steps. This answer is on cheg solutions but not all working show.

Answer 1

a) At equilibrium

Qd = Qx

7 - Px/2 = Px/4 - 1/2

15/2 = 3Px/4

Px = 60/6 = 10

Qx = 7 - 10/2 = 2 units

Graph is shown below

Demand and supply 14 13 12 11 10 4. 2. 4. Quantity -Supply Demand Price 3.

b) At the new equilibrium supply has shifted to the left

Qd = Qx

7 - Px/2 = (Px - 6)/4 - 1/2

9 = 3Px/4

Px = 36/3 = 12 (buyers)

P = 12 - 6 = 6 (sellers)

Qx = 1 unit (7 - 12/2 = 1 unit)

Hence new equilibrium price is $12 (which is paid by buyers) and quantity is 1 unit

c) Tax revenue = tax * quantity sold = 6*1 = $6