Question

The demand for rutabagas is still Q = 2,000 − 300P and the supply is still Q = −100 +100P, as in the previous question. The new Governor Pools decides that instead of imposing the $2 sales tax described in the previous question, the government will instead force stores to pay the tax directly. a. What will happen to the “sticker price” on rutabagas? b. How will the size of the consumer tax burden change? c. Howe will the size of the store's tax tax burden change?

Answer 1

Demand, Q = 2000 - 300P

Supply,Q = -100 + 100P

Equilibrium will be at that point where demand is equal to supply.

2000 - 300P = - 100 + 100P

=> 300P + 100P = 2000 + 100

=> 400P = 2100

=> P = $ 5.25

When a sales tax of $ 2 is imposed then the sticker price when consumer bear the tax burden

2000 - 300(P + 2) = - 100 + 100P

=> 400P = 1500

=>Sticker price, P = $ 3.75 / unit

Price when seller bear the tax burden

2000 - 300P' = - 100 + 100(P' + 2)

=> 2000 - 300P' = - 100 + 100P' - 200

=> 400P' = 2300

=> P' = $ 5.75

New sticker price = $ 5.75 or, $ 2 more than the sticker price before.

Consumers pay exactly the same amount as before they paid $ 3.75 per unit plus a $ 2 tax and now they pay $ 5.75 directly.

The economic incidence of the tax is unchanged.

Note: First questions sticker price is required. So I have solved it assuming a tax of $ 2 per unit. After the tax the new equilibrium condition will be

2,000 - 300P = -100 + 100 (P-2)

=> 2,000 - 300P = - 100 + 100P - 200

=> 400P = 2,300

=> P* = $ 5.75

Tax burden on consumer = (5.75-5.25) + 0 =$ 0.50 per unit

Tax burden on seller = 5.25 - 5.75 + 2 = $ 1.5 per unit

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