Question

Using Supply and Demand to Analyze Markets — End of Chapter Problem

Every autumn brings an increase in the demand for pumpkin spice lattes (PSL). This fall, the demand for PSLs in a mid‑sized midwestern town is given by ??=10−0.5?, where P is the price of a PSL in dollars and Q is thousands of PSLs per day. The corresponding supply is given by ??=−5+2?. The equilibrium price of a PSL is P^E = $6; the equilibrium quantity is ??=7. Eager to capitalize on the addictive nature of the PSL, the City Council decides to impose a $1 tax on pumpkin spice lattes. “We can use the proceeds to fund an espresso machine for City Hall!” they rave.

a. At equilibrium price and quantity,

what is the price elasticity of demand?

what is the price elasticity of supply?

b. after the City Council decides to impose a $1 tax on pumpkin spice lattes,

what is the share of the tax borne by consumers?

what is the share of the tax borne by sellers?

c. After the tax is imposed,

What is the expected price buyers will have to pay? ____ dollars

What is the expected price sellers will receive? _____dollars

Answer 1