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The demand curve for a particular market is given by: D (p) = 880 - 20p...

The demand curve for a particular market is given by: D (p) = 880 - 20p There are 100 firms operating in this market each with a cost function c (q) = q 2 /4 (i) What is the equilibrium price and quantity? Suddenly this good increases in popularity everyone is now willing to pay $1 more for the good. The government decides now is a good time to introduce a value tax of 25% on the good. (ii) What is the new equilibrium price and quantity as a result of the popularity increase and the tax? (Assume we’re in the short run so that the number of firms does not change)

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Answer #1

Equilibrium price is $4 and equilibrium quantity is 800 units

Consumers are now willing to pay $1 more for the good. The government decides now is a good time to introduce a value tax of 25% on the good.

After the increase in good's popularity and imposition of 25% tax on the good, equilibrium quantity remains the same at 800 units. Price received by producers is $4 and price paid by consumers is $5

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