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Suppose that a widget market is described by the following supply and demand equations.
Supply: Q = 3P
Demand: Q=400 - P
a. Solve for the equilibrium price and the equilibrium quantity.
b. Assume that a tax of t is placed on consumers, so the new demand equation is
Demand: Q=400 - (P + t)
Solve for the new equilibrium. What happens to the price received by suppliers, the price paid by consumers, and the quantity sold?
c. The local government's tax revenue is t x Q. Use your answer to the part (b) to solve for tax revenue as a function of t. Government's tax revenue is t x Q. Use your answer to the part (b) to solve for tax revenue as a function of t. Graph this relationship for t between 0 and 400.
d. The local government now imposes a tax on this good of $300 per
Government and Price-Determination can be understood as follows: The government might intervene in the market and mandate the maximum price (price ceiling) or the minimum price
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