Question

Consider a perfectly competitive market with demand and supply Qd = 3360 – 4P and Qs = -240+6P a

. Find the equilibrium price and quantity in the market.

b. Now suppose we impose a tax of $20 per unit on the supplier. What is the new supply curve, including the tax?

c. What are the new equilibrium price and quantity in the market with the tax?

d. How much of the tax incidence falls on the consumers in the market?

Now let’s drop the tax and open the market to imports at a world price of $200.

e. At the new world price, what are the quantities for domestic production, domestic consumption, and imports?

f. If we set an import quota of 400, what is the new domestic price and what are the quantities for domestic production and domestic consumption?

Answer 1

Qd = 3360 – 4P

Qs = -240+6P

a.

Equilibrium arises where:

Qs=Qd

-240+6P=3360-4P

6P+4P= 3360+240

10P= 3600

P*= 360 Equilibrium price

Q*= -240+6(360)= -240+2160= 1920 Equilibrium quantity

b.

A tax of $20 cause price received by seller decreases. So:

New supply curve:

Qs = -240+6(P-20)

Qs= -240+6P-120

Qs= -360+6P New supply curve

c.

New equilibrium arises where:

New supply = Demand

-360+6P= 3360-4P

10P= 3720

P**= 372 Equilibrium price paid by consumer

Q**= -360+6(372)= 1872 Equilibrium quantity

d.

After tax: Price paid by consumer= 372

Initial price= 360

Incidence of tax on consumer= 372-360= 12