1. Consider a market described by the following equations: La = a + BP Qs = Q + μP Where a, b, p and μ are parameters. Note that must be less than zero and the other parameters are positive. Answer the following questions. Solve for the equilibrium price and quantity. a. b. Now suppose a specific tax, T > 0, is imposed on this market that has to be paid to the government by sellers. Show in a clearly labeled supply and demand diagram what happens to the equilibrium effectively price received by sellers, and the price paid by buyers. Be sure to label the price received by sellers and the price paid by buyers in terms of P*(T) and T. Set up the equilibrium condition. Then solve for the price paid by buyers, the price received by sellers, and the after tax equilibrium quantity in terms of the parameters of the model and the tax amount T. C. d. Using calculus and the equation that you found for P* in part c, find an expression for the tax incidence on the buyers and determine its sign. Now, show that the formula you found for tax incidence on buyers can be found using elasticities at the market equilibrium before the tax is imposed. How does the tax incidence on buyers depend on the price elasticity of supply? Verify your result with a supply and demand diagram that varies the elasticity of supply at equilibrium. e.
1. Consider a market described by the following equations: La = a + BP Qs = Q + μP Where a, b, p and μ are parameters. Note that must be less than zero and the other parameters are positive. Answer the following questions. Solve for the equilibrium price and quantity. a. b. Now suppose a specific tax, T > 0, is imposed on this market that has to be paid to the government by sellers. Show in a clearly labeled supply and demand diagram what happens to the equilibrium effectively price received by sellers, and the price paid by buyers. Be sure to label the price received by sellers and the price paid by buyers in terms of P*(T) and T. Set up the equilibrium condition. Then solve for the price paid by buyers, the price received by sellers, and the after tax equilibrium quantity in terms of the parameters of the model and the tax amount T. C. d. Using calculus and the equation that you found for P* in part c, find an expression for the tax incidence on the buyers and determine its sign. Now, show that the formula you found for tax incidence on buyers can be found using elasticities at the market equilibrium before the tax is imposed. How does the tax incidence on buyers depend on the price elasticity of supply? Verify your result with a supply and demand diagram that varies the elasticity of supply at equilibrium. e.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
Transcribed Image Text:1. Consider a market described by the following equations:
Q₁ = a + BP
Qa
Qs = φ + MP
S
Where a, b, p and μ are parameters. Note that must be less than zero and the other parameters are
positive. Answer the following questions.
Solve for the equilibrium price and quantity.
a.
b. Now suppose a specific tax, T > 0, is imposed on this market that has to be paid to the
government by sellers. Show in a clearly labeled supply and demand diagram what happens to
the equilibrium effectively price received by sellers, and the price paid by buyers. Be sure to
label the price received by sellers and the price paid by buyers in terms of P*(t) and t.
Set up the equilibrium condition. Then solve for the price paid by buyers, the price received by
sellers, and the after tax equilibrium quantity in terms of the parameters of the model and the
tax amount T.
d.
Using calculus and the equation that you found for P* in part c, find an expression for the tax
incidence on the buyers and determine its sign.
e.
Now, show that the formula you found for tax incidence on buyers can be found using
elasticities at the market equilibrium before the tax is imposed. How does the tax incidence on
buyers depend on the price elasticity of supply? Verify your result with a supply and demand
diagram that varies the elasticity of supply at equilibrium.
C.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 1 images
Follow-up Questions
Read through expert solutions to related follow-up questions below.
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Recommended textbooks for you
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education