Question

1. Symbolic and numerical tax incidence: Consider a market described by the following equations: where Y denotes income and α, β, γ, φ, and μ are parameters. Note that β must be less than zero and the other parameters are positive. Answer the following questions. Solve for the equilibrium price and quantity. Now suppose a specific tax, τ > 0, is imposed on this market that has to be paid to the government by suppliers. How can you represent the new price paid by buyers and the new price paid by sellers? Solve for the price paid by buyers, the price paid by sellers, and the after tax equilibrium quantity. Now suppose the same tax from part (b) is changed so that it must be paid to the government by buyers. How can you represent the new price paid by buyers and the new price paid by sellers? Solve for the price paid by buyers, the price paid by sellers, and the after tax equilibrium quantity Compare your answers to parts (b) and (c). Provide a brief explanation (no more than 3 sentences) for your results. Note your answer will be related to the logic of problem 2 part (d), you might want to work through that problem before you answer this. a. b. c. d.

Answer 1