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

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  0.5t^{2}
=> 0.5t^{2}  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)
Get Answers For Free
Most questions answered within 1 hours.