Question

1. Suppose you have a demand function and supply function of Q_D = 300 - 2P and Q_S = 5P, respectively.

a. Suppose tax of $50 has been levied on the consumer. What is the new demand curve?

b. Draw both demand curves and the supply curve on one graph.

c. After the tax has been applied, what is the price that the sellers receive?

d. After the tax has been applied, what is the price that the consumers pay?

e. How much of the $50 tax do the sellers pay?

f. How much of the $50 tax do the consumers pay?

2. Suppose you have a demand function and supply function of Q_D = 300 - 5P and Q_S = 2P, respectively

a. Suppose tax of $50 has been levied on the consumer. What is the new demand curve?

b. Draw both demand curves and the supply curve on one graph.

c. After the tax has been applied, what is the price that the sellers receive?

d. After the tax has been applied, what is the price that the consumers pay?

e. How much of the $50 tax do the sellers pay?

f. How much of the $50 tax do the consumers pay?

Answer 1

Equilibrium price occurs when demand equals supply

1)

a) There is no shift in demand curve.

b)

This is for part A: At a tax of $50, tax will be shared among both buyers as well as sellers which will fall in the ratio of (demand curve touching price axis - equilibrium price) to (equilibrium price - supply curve touching price axis) which is (150 - 42.85) / (42.85 - 0) = 107.15 / 42.85

Burden on consumers would be [107.15 / (107.15 + 42.85)] of total tax which is 71.43% sum to 0.7143 * 50 = $35.71 while burden on producer is [42.85 / ((107.15 + 42.85)] which is 28.56% sum to 0.2856 * 50 = 14.28

c) After tax Seller receive 28.56 (Equilibrium Price - Tax on sellers)

d) After tax buyer pay 78.56 (Equilibrium Price + Tax on buyers)

e) Seller pay (42.85 - 0) / (150 - 0) = 28.56% of the tax which is 14.28

f) Buyer pay (150 - 42.85) / (150 - 0) = 71.43% of the tax which is 35.71

2)

a) There is no shift in demand curve.

b)

This is for part A: At a tax of $50, tax will be shared among both buyers as well as sellers which will fall in the ratio of (demand curve touching price axis - equilibrium price) to (equilibrium price - supply curve touching price axis) which is (60 - 42.85) / (42.85 - 0) = 17.15 / 42.85

Burden on consumers would be [17.15 / (17.15 + 42.85)] of total tax which is 28.58% sum to 0.2858 * 50 = $14.29 while burden on producer is [42.85 / ((17.15 + 42.85)] which is 71.41% sum to 0.7141 * 50 = 35.70

c) After tax Seller receive 7.14 (Equilibrium Price - Tax on sellers)

d) After tax buyer pay 57.14 (Equilibrium Price + Tax on buyer)

e) Seller pay (42.85 - 0) / (60 - 0) = 71.41% of the tax which is 35.70

f) Buyer pay (60 - 42.85) / (60 - 0) = 28.58% of the tax which is 14.29

Supply 42.85 28.56 Demend 142.8 214.28 300 Quantity

Supply {1.14 - - - 42.85 7.14 Demand 14.28 85 * 300 Puontity