Question

In: Economics

Market demand is QD= 50-P and the market supply is QS=P. The government imposes a percentage...

Market demand is QD= 50-P and the market supply is QS=P. The government imposes a percentage tax of 30%. What is the new equilibrium price and quantity? Select one: a. P*=25; Q*=25 b. P*=20; Q*=30 c. P*=30; Q*=20 d. P*=30; Q*=30 e. None of the above

Expert Solution

Answer- Correct option is 'a'

Given,

QD = 50-P

QS = P

Tax imposed by government = 30 %

The new equilibrium price condition: QD = QS

After tax: QD + 30% = QS + 30 %

50 - P + 30% = P + 30%

50 = P + P + 30% - 30%

50 = 2 P

2 P = 50

P = 50 / 2

P* = 25

The new equilibrium price is 25

The new equilibrium quantity: QS = P

Q* = 25

The new equilibrium quantity is 25

Rahul Sunny answered 9 months ago

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