Question

Assume a perfectly competitive market without externalities. Market Demand is given by P=60-Q and Market Supply is given by P=Q+2. The government imposes a per-unit tax of t=4 which the seller pays. What is market price? Enter a number only, no $ sign.

Answer 1

A) 33

First of all we have to find the price (P) and quantity( Q) before the imposition of tax based on given market supply and market demand.

marketdemand p =60-Q

Market supply, p= Q + 2

Solving for the equation ( Q gets cancelled), we get

2P =62

P =31

Q= 60-31= 29

*Supply function after the imposition of tax is P =Q+2+4

P = Q+6

We can find Market price by equating this with the demand function P = 60-Q

Solving for the equation ( Q gets cancelled by adding)

2P= 66

P = 66/2=33

When per unit tax of 4 is imposed, market supply Increases to 33.