How we found 600? 1-19 1) Excise Tax: An excise tax is an indirect tax which is

Question

How we found 600? 1-19 1) Excise Tax: An excise tax is an indirect tax which is levied at the moment of manufacture rather than at sale. Given, the supply curve is Pand curve 0 so-P Where,is the quantity supplied 0 the demand is the quantity demanded Pis the equilibrium price Let the required tax be ST The equilibrium is P p+ Substitute the values: 50-0-0+T 0-25-0.5T As the required amount is $300,000 also Q is measured in thousands of units. Hence0 - 600 Therefore, (25-0.5T)-600 ST-0.5T-600-0 Solving the equation T is either $20 or $30 Therefore, the excise tax should be $20 in order to raise the required amount of money

Explanation / Answer

When T stands for tax rate and Q stands for quantity of output in thousands then T*Q acrually represents total revenue from tax.

If given amount $300,000 is the amount that is need to be raised as tax revenue thus T*Q should be equal to 300 rather than 600.

As already written Q is in 1000s thus we are taking 300 only not 300,000

Now do the calculation again

T(25-0.5T) = 300

25T - 0.5T2 -300 = 0

T1 = -b+(b2-4ac)0.5 / 2 = (-25+((25*25)-4*(-0.5)*300)^0.5) / 2 = 5

or T2 = (-25-((25*25)-4*(-0.5)*300)^0.5)/2 = -30

as tax could not be -30 then it should be $5 per unit.

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