Question

3. Suppose the market for widgets can be described by the following equations: Demand: P= 10 - Q Supply: P=Q-4 where P is the price in dollars per unit and Q is the quantity in thousands of units. a. What is the equilibrium price and quantity? (2 points) b. Suppose the government imposes a tax of $1 per unit to reduce widget consumption and raise government revenues. What will the new equilibrium quantity be? What price will the buyer pay? What amount per unit will the seller receive? How do sellers and consumers split the tax? (2 points)

Answer 1

3 P-10-Q a = 10-P P20-4 9=Pty At equilibrium 10 - P = PTY 10-4 =P+P - 2P-6 I S : 10-3 = 7 JP= 38=71

After - taxe: 10- (P +1) as = pty equilibruin lo - (p + 1) = P +4) 10 - 1 apty 9 - P - o ty 2Pas P-2 .5 Ao – 10- (2.5+1) = 6.5 Os - 2.sty 26.5 PD = -4 : 6.5-4 = 2.5
Ps=Price sellers receive

Pd=Price consumers pay

Q=Equilibrium Quantity.

Consumers and producers bear the same burden of the tax.