Question

14.Let D(p)=95-5p be the demand function and S(p)=5p be the supply function. Suppose a tax of $1 is imposed. What is the equilibrium quantity with the tax?

Group of answer choices

40

20

45

neither one is correct

35

15. Let D(p)=95-5p be the demand function and S(p)=5p be the supply function. Suppose a tax of $1 is imposed. What is the deadweight loss of the tax?

Group of answer choices

neither one is correct

2.5

1.25

1

2.25

Answer 1

14.D(p) = 95 - 5P

S(p) = 5P

At Equilibrium

D(p) = S(p)

95 - 5P = 5P

10P = 95

P = 9.5

Equilibrium Price = $9.5

Equilibrium Quantity = 95 - 4 * 9.5 = 95 - 47.5 = $47.5

Tax = $1. This means wedge of $1 is created between price paid by consumers and price received by suppliers.

Price per unit paid by Consumers = 9.5 + 0.5 = $10

Price per unit Received by Supplier = 9.5 - 0.5 = $9

Equilibrium Quantity with Tax

Put P = $10 in demand function

= 95 - 5 * 10 = 95 - 50 = 45

Put P = $9 in supply function

= 5 * 9 = $45

So, Equilibrium Quantity is 45.

Option C is Correct.

15. Calculation of Deadweightloss

Deadweightloss = 1/2 * Base * Height

Height = Tax Wedge = Amount of Tax = $1

Base = Difference between Equilibrium Quantity without Tax and Equilbrium Quantity with Tax

= 47.5 - 45 = 2.5

Deadweightloss = 1/2 * 2.5 * 1 = $1.25

Option B is Correct