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Question 8

The original supply and demand curves for widgets were P = 80 - Q (demand) and P = 20 + 2Q (supply). With a new $6 per unit tax on suppliers, the supply curve becomes P - 6 = 20 + 2Q. Setting the new supply and demand curves equal gives an equilibrium quantity of 18 units and price of $62, which includes the $6 tax, making the pre-tax price $56.

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65 views1 page

Question 8

The original supply and demand curves for widgets were P = 80 - Q (demand) and P = 20 + 2Q (supply). With a new $6 per unit tax on suppliers, the supply curve becomes P - 6 = 20 + 2Q. Setting the new supply and demand curves equal gives an equilibrium quantity of 18 units and price of $62, which includes the $6 tax, making the pre-tax price $56.

Uploaded by

Orko Abir
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOC, PDF, TXT or read online on Scribd
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Question 8: Given the following data: WIDGETS P = 80 - Q (Demand) P = 20 + 2Q (Supply) Now suppliers must pay a tax of $6 per unit.

Find the new equilibrium price-inclusive price and quantity. ---Answer: Now suppliers do not get the full price when they make a sale - they get $6 less. This changes our supply curve to: P - 6 = 20 + 2Q (Supply) P = 26 + 2Q (Supply) To find the equilibrium price, set the demand and supply equations equal to each other: 80 - Q = 26 + 2Q 54 = 3Q Q = 18 Thus our equilibrium quantity is 18. To find our equilibrium (tax inclusive) price, we substitute our equilibrium quantity into one of our equations. I'll substitute it into our demand equation: P = 80 - Q P = 80 - 18 P = 62 Thus the equilibrium quantity is 18, the equilibrium price (with tax) is $62, and the equilibrium price without tax is $56. (62-6)

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