Question

15) In a competitive market, the market supply and market demand functions are given by QS = 4p and QD = 100 ? p respectively. The government imposes a $10 tax per unit traded in the market. How much revenue does the tax generate for the government in the short run?

a) ..........$0
b) ..........$800
c) ...........$720 (+) d) ...........$700
e) ...........$820

16) Refer to question 15. How much revenue does the tax generate for the government in the long run?

a) ..........$0

b) ..........$800

c) ...........$720 (+)

d) ...........$700
e) ...........$820

Answer 1

ANSWER : The equlibrium condition of competitive market is demand equal to supply .

so , Q_D = Q_S

given that Q_D  = 100 - P and Q_S = 4P

QD = QS

The value of P is substitute in demand function we get market demand Q_D = 100 - 20 = 80 units.

a ) in the short run when govt. impose $10 as tax on each unit traded in the market but tax is included in commodity prices , it generate tax revenue is doller.

b ) But given the situation , in the long run , equlibrium quantity of demand and supply is 80 unit and market price is $20 but tax is also $10 so tax revenue is generate is 800 doller.