Assume the demand function for basketballs is given by QD=150-3P+0.1i where P=th

Question

Assume the demand function for basketballs is given by QD=150-3P+0.1i where P=the price of basketballs and I=average income of consumers. Also, assume the supply of basketballs is given by QS=2P. If the market for basketballs is perfectly competitive, and the average income is equal to $1500, what are the equilibrium price and quantity? What if a 20% income is introduced?

a. Before taxes, the equilibrium price is $60, and 120 basketballs are traded. Once the income tax is introduced.

b. Before taxes, the equilibrium price is $60, and 120 basketballs are traded. Once the income tax is introduced, the price would decrease by $6, and only 108 basketballs would be traded.

c.Before taxes, the equilibrium price is $60, and 120 basketballs are traded. Once the income tax would have no effect on the equilibrium price net of the tax quantity.

d. Before taxes, the equilibrium price is $150, and 120 basketballs are traded. Once the income tax is introduced, the price would decrease by $26, which would cause the quantity of basketballs traded to increase.

Explanation / Answer

b. Before taxes, the equilibrium price is $60, and 120 basketballs are traded. Once the income tax is introduced, the price would decrease by $6, and only 108 basketballs would be traded.

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