Question

Consider the following model for the toothbrush market in Delhi. Suppose the aggregate demand
for brushes in Delhi is given by QD = 900-P/2 where P denotes the price and Q denotes the quantity
of brushes. The aggregate supply for brushes in Delhi is given by QS = P/4.
(a.) Compute the toothbrush market equilibrium. What are the equilibrium price and quantity?
(b.) Now suppose a tax of t = 60 is imposed on each brush that is purchased. Write down the
changed post-tax demand and supply equations and compute the brush market equilibrium
with the tax. What are the equilibrium price that the sellers receive, and what is the post-tax
equilibrium quantity transacted?
(c.) What is the price paid by the buyers and therefore, what is the incidence of the tax? Explain
the intuition behind the key factors that determine the incidence.
(d.) Compute and graphically depict dead-weight loss due to the tax.

Answer 1

a)