Question

Assume that the demand function for a particular good is Qd=90-2P and the supply function is Qs= -10+2P. Assume that the market for the particular good was initially the equilibrium (with no taxes, no regulation, etc.). Assume that a tax of $1 is imposed on the sellers of the good. How will the incidence of the tax be distributed between the sellers (producers) and the buyers (consumers) of the good?

Answer #1

Qd=90-2P

Qs= -10+2P

At equilibrium Qs=Qd

90-2P=-10+2P

100=4P

P=25

Q=-10+2(25)=40

If a tax of $1 is imposed on the sellers the consumers will pay full price but the sellers will receive less, the new supply function will be:

Qs=-10+2(P-1)

Qs=-10+2P-2

Qs=-12+2P

New equilibrium

-12+2P=90-2P

4P=102

P=25.5

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