Question

In: Economics

Suppose the supply curve and demand curve for the market of shoes is as follows: Qd=30-2P...

Suppose the supply curve and demand curve for the market of shoes is as follows:

Qd=30-2P

Qs=15+P

Suppose a $2 tax is imposed on the buyer. Find the new equilibrium Q, Pb and Ps. SHOW YOUR WORK.

Suppose a $2 subsidy is imposed on the seller. Find the new equilibrium Q, Pb and Ps. Show your work.

Expert Solution

Suppose a $2 tax is imposed on the buyer, then there will be difference of $2 between the price paid by the buyers and price received by suppliers and the price paid by buyers will be higher than the price paid received by suupplier or Pd-PS=2 where Pd is price paid by the buyers and Ps is price received by suppliers.

The inverse demand curve is Pd= 15-Qd/2

The inverse supply curve is Ps=Qs-15

The equilibrium condition when tax is imposed: Pd - Ps=2 and Qd=Qs.

15-Q/2 - Q +15 =2. Solving for Q we get the equilibrium quantity Q=56/3=18.67

Pd=15-18.67/2=5.67

Ps=18.67-15=3.67

(b) Suppose a $2 subsidy is imposed on the seller, then there will be difference of $2 between the price paid by the buyers and price received by suppliers but this time price received by suppliers will be higher than the price paid by buyers.

The equilibrium condition when subsidy is imposed: Ps - Pd=2 and Qd=Qs.

Q-15-15+Q/2=2. Solving for P, we get the equilibrium quantity Q=64/3=21.33

Pd=15-21.33/2=4.33

Ps= 21.33-15=6.33

Rahul Sunny answered 2 years ago

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