Question

Suppose that the inverse demand for webcams is given by P = 150 – Q and the inverse supply for webcams is given by P = 30 + 2Q.

1. (20 points) If the market for webcams faces a quota of 30 units, then what are the equilibrium price and quantity?
2. (20 points) If the market for webcams faces a quota of 30 units and a tax of $60 per webcam, then what are the equilibrium price and quantity?
3. (10 points) In dollars, what is the tax incidence across consumers and suppliers in this case?

Answer 1

Inverse Demand function is P= 150- Q and Inverse Supply function is P= 30+ 2Q

1) Equilibrium price and quantity when a quota of 30 units is imposed.

150-Q-30= 30+2Q-30

  120= 3Q

   Q= 40.

Therefore putting the value of Q in the equation, P= 110.

2) Equilibrium price and quantity when quota pf 30 units and tax of 60 per unit is imposed.

   150-Q+ 60Q - 30 = 30+ 2Q-30+60Q

Q= 40.

Therefore putting the value of Q in the equations above, the equilibrium price is $110.

3) Calculating tax incidence across consumers and suppliers in this case-

tax= 60Q

Q= 40

Hence, 60Q= 2400

Therefore the tax incidence is $2400