The market for cigars is characterized by QD = 10 – 0.25 P and QS =...

The market for cigars is characterized by Q^D = 10 – 0.25 P and Q^S = 0.15 P, where P is price per box of cigars and Q measures boxes per hour.

a.	What is the equilibrium price of cigars?
b.	Suppose the government taxes sellers $5 per box. What are the after-tax prices that buyers pay and sellers receive?
c.	Suppose the government taxes buyers rather than sellers $5 per box. What are the after-tax prices that buyers pay and sellers receive?

Expert Solution

a. At equilibrium, QD = QS
So, 10 - 0.25P = 0.15P
So, 0.25P + 0.15P = 0.40P = 10
So, P = 10/0.4
So, P = 25

b. As tax is paid by sellers, so price received by sellers decrease to P - 5.
QS = 0.15(P-5) = 0.15P - 0.75
Now, at equilibrium, QD = QS gives,
10 - 0.25P = 0.15P - 0.75
So, 0.25P + 0.15P = 0.40P = 10 + 0.75 = 10.75
So, P = 10.75/0.4 = 26.875

Price paid by buyers = 26.875
Price received by sellers = 26.875 - 5 = 21.875

c. As tax is paid by buyers, so price paid by buyers increase to P + 5.
QD = 10 - 0.25(P+5) = 10 - 0.25P - 1.25 = 8.75 - 0.25P
At equilibrium, QD = QS gives,
8.75 - 0.25P = 0.15P
So, 0.25P + 0.15P = 0.40P = 8.75
So, P = 8.75/0.4
So, P = 21.875

Price paid by buyers = 21.875 + 5 = 26.875
Price received by sellers = 21.875

Rahul Sunny answered 2 years ago

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