The market for smart phone applications is characterized by the following demand and supply curves. QD = D(P) = 15 - 3P QS = S(P) = 5 + 10P (a) Calculate the equilibrium price and quantity for this market. (b) The government is considering introducing a per unit subsidy of t on each electric car that is purchased. Suppose that the statutory incidence of this subsidy will be on buyers. Using the equilibrium conditions, D(Pn - t) = S(Pn) = Q* (i.e. that demand equals supply in equilibrium), derive an equation in terms of es and ed that describes what fraction of the subsidy is borne by buyers/consumers. (c) Suppose that the unit tax is set at t = 0.1 per unit. What is the excess burden of this tax per dollar of revenue raised? (d) Suppose that we incorrectly assumed that supply was perfectly elastic and there was no impact of the tax on the equilibrium price received by sellers. Would EB/Tax Revenue be higher or lower than what you calculated in part (c)? In 4 sentences, explain your answer.

The market for smart phone applications is characterized by the following demand and supply curves. QD = D(P) = 15 - 3P QS = S(P) = 5 + 10P (a) Calculate the equilibrium price and quantity for this market. (b) The government is considering introducing a per unit subsidy of t on each electric car that is purchased. Suppose that the statutory incidence of this subsidy will be on buyers. Using the equilibrium conditions, D(Pn - t) = S(Pn) = Q* (i.e. that demand equals supply in equilibrium), derive an equation in terms of es and ed that describes what fraction of the subsidy is borne by buyers/consumers. (c) Suppose that the unit tax is set at t = 0.1 per unit. What is the excess burden of this tax per dollar of revenue raised? (d) Suppose that we incorrectly assumed that supply was perfectly elastic and there was no impact of the tax on the equilibrium price received by sellers. Would EB/Tax Revenue be higher or lower than what you calculated in part (c)? In 4 sentences, explain your answer.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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