A $3 tax is imposed on the sale of a particular industrial product. If the demand...

A $3 tax is imposed on the sale of a particular industrial product. If the demand for that product is QD=60-5P and supply for that product is QS=10P-30. Calculate the equilibrium price(s) and quantity after the tax.

Solutions

Expert Solution

In this case, Producer will get $(P-3) for every $P paid by consumer.

New demand function will remain unchanged. i.e.

Q_D=60-5P

New Supply function can e obtained by replacing P by (P-3)

Q_S=10*(P-3)-30=10P-30-30=10P-60

In Equilibrium, Q_D=Q_S

60-5P=10P-60

120=15P

P=$8 per unit

Now calculate Q_D and Q_S at P=$8

Q_D=60-5P=60-5*8=20

Q_S=10P-60=10*8-60=20

Equilibrium Price after tax= $8 per unit

(Consumer will pay a price of $8 per unit. Producer will have $5 per unit after paying a tax of $3 per unit)

Equilibrium quantity after tax= 20 units

Rahul Sunny answered 2 years ago

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