Question

Let the market demand curve be QD=8-P and the market supply curve be QS=P. Let price P be measured in $/unit and let quantity Q be measured in singular units (i.e. simple count).

Solve for the equilibrium price P* and quantity Q*.

Now, assume the government imposes a $2/unit tax on consumers, which leads to wedge/gap between the buyers’ price Pb and the sellers’ price PS.

Rewrite the demand and supply curves using Pb and PS, respectively.

Write down the equation relating Pb and PS with respect to the tax=2

Solve for the post-tax, equilibrium buyers’ price Pb, seller’ price PS and new quantity Q'.

Now, calculate the revenue generated from imposing the tax, and calculate the deadweight loss (DWL) from imposing the tax.

Answer 1