8. Market demand for good Y is described by function YD = 250 – 6PD, where PD is

Question

8. Market demand for good Y is described by function YD = 250 – 6PD, where PD is the demand price and YD is the quantity of good Y demanded. Market supply of good Y is given by function YS = 4PS, where PS is the supply price and YS is the quantity of good Y supplied.

b) Suppose that a tax 5 euros is applied per unit of good Y, while the rest of the factors that could affect demand or supply remain unchanged. Find the market equilibrium (the equilibrium quantity, the demand price and the supply price) that will exist in this market after this tax.

Explanation / Answer

b) NOw a tax 5 euros is applied on good Y .

so, the demand fucntion remain the same. that is YD = 250 -6PD or P = 41.7 - 0.17Q

supply function = YS = 4PS or P = Q/4 P

supply fucntion changes to = P - 5 = Q/4 or P = 0.25Q +5

( because supplied recieve 5 euros less after tax is imposed)

for makret equilbruim Demand is equal to the supply

41.7-0.17Q = 0.25Q + 5

41.7 - 5 = 0.25Q +0.17Q

36.7 = 0.42Q or Q = 87.38

and demand price = P = 41.7 - 0.17 * 87.38 = 41.7 -14.85 = $26.85

And supply price = P = 5 + 0.25*87.38 = $26.84

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