A market is described by the equation Qd=100-P and Qs=P. A tax of $10 is placed...

A market is described by the equation Qd=100-P and Qs=P. A tax of $10 is placed on the seller of the product such that he will receive less to take home than the original equilibrium price. Therefore, the new supply equation becomes Qs=(p-t). Does the seller pay the whole $10 of the tax burden? How much does the seller pay? How much does the buyer pay? Why do they split the burden this way?

Solutions

Expert Solution

Original equilibrium price and quantity

100-P=P

100= 2P

P = 100/2 =50

Q = 100-50 =50

New equilibrium price and quantity

100-P=P-10

100+10 = 2P

P = 110/2 = 55

Q = 100-55 = 45

The seller does not pay the whole $10 of the tax burden

Sellers pay = 50-45 =5

Buyers pay = 55-50 = 5

They split the burden this way because the burden on each party depends upon the elasticity of the supply and demand curves.If the elasticity is same, both buyer and seller will pay the equal burden of the tax.

Rahul Sunny answered 1 year ago

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