Assume the demand function for basketballs is given by QD = 150 - 3P + 0.1I, whe

Question

Assume the demand function for basketballs is given by QD = 150 - 3P + 0.1I, where P = price of a basketball 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 $1,500, what are the equilibrium price and quantity? What if a 20% income tax is introduced?
Answer







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








Before the tax, 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.








Before the tax, the equilibrium price is $60, and 120 basketballs are traded. Once the income tax is introduced, the price would decrease by $6, which would cause the quantity of basketballs traded to increase.








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

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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