Question

Suppose the demand for video games is q=40-2p and the supply is q=3p, and there is a quantity tax, $5 per unit of the video game. 1. Compute the equilibrium quantity and price before the tax; 2. Compute the equilibrium quantity and prices for both buyers and sellers after the tax; 3. Compute the total tax revenue raised by the government and the fraction of tax the buyers need to paytax paid by buyers/total tax revenue). 4. Compute the dead weight loss as a result of this tax.

Answer 1

9 = 40 - 20 19 - 3p @ To compute equilibrium price and quantity, 40-20 = 3p 40 = = Using p = 8 9 = 3p = 3(8) = 24 - Dualq = 24 2. Rewrite ① and 2 q = 40-2p - 26 = 40 - q Jp = 40 - 9 q = 3p = [p = 9 With $5 tax per unit the supply curve would now be, p = q + Sil To compute post tax equilibrium price and quantity,

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Price received by suppliers - 9 - 18 - $6 bice paid by consumers = 40 - 9x - 40-18 3. Total daised tax revenue by got. = tax x = $SX 9* Consumer's tax incidence = ($11 – $8)x q* $3x18 = $54 fraction of tax by buyers = $st = 18 4. Dead Weight Loss x (24-18) x(11-6) - 1x 6 x 5

This shaded area is the Tax Revenue This triangle represent Dead Weight Was 18 24 Ars