Question

1. Assume S(P-)=50+P- D(P+)=370-3P+ Sales tax of 20% Calculate the equilibrium buyers' and sellers' price with no sale tax, and then with the 20% tax assumed above.

2. Assume S(P-)=50+3P- D(P+)=370-P+ Sales tax of 20% Calculate the equilibrium buyers' and sellers' price with no sale tax, and then with the 20% tax assumed above.

3. Explain how you answer for question 1 and 2 illustrate the principle that the less responsive side of the market (with a smaller price coefficient) will pay more than half the total cost of a sales tax.

4. Draw diagrams of question 1 and 2 and explain how they illustrate your answer to question 3. [Hint: Be careful about drawing the relative slopes of the supply and demand functions.]

Answer 1

Following is the solution for ques 1.

Similarly, for the ques two, the equilibrium quantity and price would be 290 and 80 respectively before taxation. after taxation, the equilibrium price and quantity will be 246.5 and 123.5 respectively.

As we can see from the graphs that in demand curve in question 2 is steeper than in question 1. The steeper the curve is, more elastic or more responsive it is with respect to price. If we compute the effcet for the taxation, we can say that the price has risen more for the consumers in question 1, that is more part of the tax will now be borne by teh consumer as compared to supplier.

In terms of supply curve, the supply curve is more steep in ques 1, than in question 2. Less responsive supply curve means more is to be paid by the supplier.