Question

2. Demand and supply in a market are expressed as follows: 2P + QD = 20 P - QS = 1. Suppose now that the government decides to introduce a tax per unit sold in the amount t = $3.

a) Determine the new equilibrium quantity in the market, the prices paid by consumers and received by sellers, as well as the government's revenues.

b) Represent the changes occurring in equilibrium on a graph. Identify on that graph the deadweight loss generated by the tax. Explain your answer.

c) Determine the elasticities of demand and supply between the initial equilibrium point and the new equilibrium for consumers and producers, according to the price each of them pays or receives. What do these values tell you about who shares most of the burden of the tax? Is that conclusion consistent with the results you obtained in part a? Explain.

Answer 1