Economics - Demand and supply
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Consider the following model of a market
Qd = b0 + b1 P
Qs = a0 + a1 P
where Qd and Qs represent quantities demanded and supplied,P is price, and it is assumed that b0 >0, b1<0, b0 > a0, a1>0 and b0 a1 > b1 a0 .
i)Find the reduced form solutions for equilibrium price and quantity.
ii)Suppose a per unit tax of "t"is imposed on the consumers for the purchase of the good. Do the consumers end up paying the entire tax "t" on each unit of purchase or do they manage to shift (pass on) part of it to the firm? Explain and defend your answer by giving exact amounts. (Note: don't choose numerical values for b0, b1, a0, a1, and t).
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Solution Summary
The solution determines the demand and supply in the economics question.
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i)Find the reduced form solutions for equilibrium price and quantity.
At equilibrium, Qd = Qs
b0 + b1P = a0 + a1P
P(b1 - a1) = a0 - b0
P = (a0 - b0) / (b1 - a1)
Quantity = b0 + b1 [ (a0 - b0) / (b1 - a1)]
ii)Suppose a per unit tax of ...
Education
- BE, Bangalore University, India
- MS, University of Wisconsin-Madison
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