Question

1. Symbolic and numerical tax incidence: Consider a market described by the following equations:

?? = ? + 1 − ??

?? = ?

Here A is a fixed parameter. Answer the following questions.

a. Solve for the equilibrium price and quantity.

P* = ________

Q* = ________

b. Now suppose a specific tax, ? > 0, is imposed on this market that has to be paid to the government by

suppliers. Using ??∗ and ?, give the new price paid by buyers and the new price received by sellers.

Solve for the price paid by buyers, the price received by sellers, and the after tax equilibrium quantity.

c. Determine the marginal effect of an increase in the tax rate ? on the price paid by the buyer and the

quantity sold in the market.

d. How does the tax incidence on the buyer vary with A? In no more than two sentences, provide an

economic explanation in terms of elasticity of demand.

e. Now suppose the same tax from part (b) is changed so that it must be paid to the government by

buyers. Using ??∗ and ?, give the new price paid by buyers and the new price received by sellers. Solve

for the price paid by buyers, the price received by sellers, and the after tax equilibrium quantity.

f. Compare your answers to parts (b) and (e). Provide a brief explanation (no more than 3 sentences) for

your results. Note your answer will be related to the logic of problem 2 part (d), you might want to

work through that problem before you answer this.

Answer 1