Question

3. Starting with QD = 450 – 2.5P and QS = 90 + 5P and supposing that the government imposes an excise tax of $3 per unit collected from producers, find (a) the new equilibrium price and quantity and (b) how much of the tax is actually paid by consumers and how much falls on producers

To work problem 3 you must do the following.

1. Find the pre-tax equilibrium price and quantity. The amount of the tax paid by consumers is the amount by which the price of the product goes up. You will need the pre-tax equilibrium to compare to the post-tax equilibrium
2. Find the reverse supply function. A normal supply equation tells you what the quantity supplied is for any given price. You, however, need to add the excise tax, measured in dollars, to the cost, measured in dollars. So you need to rewrite the supply equation algebraically so that is shows dollars (i.e., price) at each possible quantity supplied. This is called a reverse supply function.
3. Add the excise tax to the constant to get the reverse supply function with the tax included.

Answer 1