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.
To summarize:
a) The market price with no tax is determined when supply equals demand, which in this case is at $7.
b) When a $2 tax is imposed, the price people pay increases to $9. However, the firm only earns $7 as the tax does not give them extra income. Due to this increased price, the firm wants to sell 125 units while consumers only want to buy 75 units. To find the new equilibrium price, we look for where quantity demanded equals quantity supplied at a price level $2 higher for consumers. In this case, it is $8. The firm earns $6 of the $8 price, so they want to supply 100 units, and consumers demand 100 units at a price of $8.
c) With a $2 tax, the burden is distributed between the firm and the consumer. Prior to the tax, the firm made $7 per unit and consumers paid $7. After the tax, the firm's income per unit decreases to $6, while consumers now have to pay $8. Each side absorbs $1 of the tax burden.