Question

A2.	You are told that the initial supply curve in a market is ? = ? and the initial demand curve in the market is ? = 100– ?. An excise tax is imposed in this market and it results in the government collecting $1250 in tax revenue. The excise tax in this market is equal to $50. $25. $20. $10.

Answer 1

Market supply Curve: P = Q

An excise tax is imposed in this market.

Let's assume t is the excise tax.

After the imposition of excise tax, the market supply curve will shift to the left.

New market supply curve: P = Q + t

Market demand curve: P = 100 - Q

At equilibrium after excise tax , new supply = Demand

=> Q+t = 100 - Q

=> Q + Q = 100 -t

=> 2Q = 100 - t

=> Q = (100 -t) /2

=> Q = 50 - 0.5t

Amount traded after impostition of tax.

Government tax revenue = Tax rate * Quantity after tax

=> 1250 = t * (50 - 0.5t)

=> 1250 = 50t - 0.5t²

=> 0.5t² - 50t + 1250 = 0

After solving the above quadratic equation, we got the following two values of t

t = 50 or t = 50.

Thus, the excise tax rate in this market is $50.

Answer: Option (A)