Posted by tony on .
Market price with no tax is where supply equals demand, so at $7.
b) The two dollar tax is reflected in the price that people have topay, but it does not give a firm extra income. For instance, pricewas $7 in part a. Now with the tax, people pay $9, but the firmonly earns $7. So the firm wants to sell 125, and consumers onlywant to buy 75. So basically, you look for where quantity demandedequals quantity supplied at a price level 2 dollars higher for theconsumers. Here it is $8. The firm earns 6 of that 8, so they wantto supply 100, and people demand 100 at a price of $8. Quantityequals 100.
c) Each side picks up one dollar of the tax; the firm used to make7 dollars per unit and now only makes six, and the consumer used topay 7 dollars and now they pay 8.