suppose the market demand function for ice cream is Q^d = 10 - 2P and the...

suppose the market demand function for ice cream is Q^d = 10 - 2P and the market supply function for ice cream is Q^5 = 4P - 2, both measured in millions of gallons of ice cream per year. Suppose the government imposes a $0.50 tax on each gallon of ice cream produced. The price received by sellers with the tax is?

a. 2.33

b. 1.50

c. 1.73

d. 1.83

Solutions

Expert Solution

New supply after tax:

(Qs + 2)/4 + 0.5 = P

Qs' = 4P - 4

Qd = 10 - 2P

At equilibrium: Qs' = Qd

4P - 4 = 10 - 2P

P = 2.33 (price paid by buyers)

Price received by sellers = 2.33 - 0.5 = 1.83 (option d)

Rahul Sunny answered 2 years ago

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