1. Assume S(P-)=50+P- D(P+)=370-3P+ Sales tax of 20% Calculate the equilibrium b
ID: 1168027 • Letter: 1
Question
1. Assume S(P-)=50+P- D(P+)=370-3P+
Sales tax of 20%
Calculate the equilibrium buyers' and sellers' price with no sale tax, and then with the 20% tax assumed above.
2. Assume S(P-)=50+3P- D(P+)=370-P+
Sales tax of 20%
Calculate the equilibrium buyers' and sellers' price with no sale tax, and then with the 20% tax assumed above.
3. Explain how you answer for question 1 and 2 illustrate the principle that the less responsive side of the market (with a smaller price coefficient) will pay more than half the total cost of a sales tax.
4. Draw diagrams of question 1 and 2 and explain how they illustrate your answer to question 3.
[Hint: Be careful about drawing the relative slopes of the supply and demand functions.]
5. Suppose the government sets a controlled price below the market clearing price for a commodity. Draw a diagram and use the idea of a maximum buying price to explain whether the total price paid by the buyers will end up lower or higher than before.
Could someone help me with number 3,4, and 5? Please and thank you!!
Explanation / Answer
Answer 1:
Sales tax is calculated by multiplying the purchase price by the applicable of tax.Or tax=0.2P But consumers will pay only part of it.It depends on tax incidence. The calculation of tax incidence can be done using the formula,
PES/(PES-PED)
In equilibrium, 50+P=370-3P,P=320/4=80,Qs=Qd=50+80=130
PED=dQ/dPxP/Q= -3 x 80/130= -1.846
PES=dQ/dPxPxQ= 1x80/130=0.615
Tax incidence= 0.615/(0.615-(-1.846)=25% will be paid by consumer,and 75% will be paid by seller.
That mean the price paid by consumer will be up by 25%,or Pe(1+0.25)=1.25Pe or 1.25x80=$100
Qd=370-300=70
The price received by seller will be down by 75%, = 80-60=$20
Qs=50+20=70
Answer 2 :
In equilibrium, 50+3P=370 -P,P=320/4=80,Qs=Qd=50+240=290
PED=dQ/dPxP/Q= -1x 80/290= -0.276
PES=dQ/dPxPxQ= 3x80/290=0.828
Tax incidence= 0.828/(0.828-(-0.276=75% will be paid by consumer,and 25% will be paid by seller.
That mean the price paid by consumer will be up by 75%,or Pe(1+0.75)=1.75Pe or 1.75x80=$140
Qd=370-140=230
The price received by seller will be down by 25%, = 80-20=$60
Qs=50+180=230
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