The market equilibrium price of a good is $50 and the quantity is 80,000 units.
ID: 1098561 • Letter: T
Question
The market equilibrium price of a good is $50 and the quantity is 80,000 units.
However, in producing the good, the producers generate a MD of $8 per unit of output. Now suppose that the government levies a pollution tax on producers of $8 per unit. Naturally, the producers will try to shift the tax onto consumers in the form of a higher price. Return to the original equilibrium price of $50 and quantity of 80,000 units. In this case, assume that the price increases to $56 and the quantity falls to 78,000.
a.) Calculate the price elasticity of demand over the price range between $50 and $56.
b.) What part of the price increase is paid by the consumers? What part is paid by the producers? Does this make sense given the price elasticity of demand?
c.) Calculate the tax revenues the government would collect
Please this is urgent!! Thank You!
Explanation / Answer
price paid by customers = $56
price received by suppliers = $56-$8 = $48
price elasticity of demand = [(change in quanitity/quantity)/(change in price/price)] = -(2000/80000)/(6/50) = 0.21
price elasticity of supply = [(change in quanitity/quantity)/(change in price/price)] = (2000/80000)/(2/50) = 0.625
price increased paid by consumers = $8*0.625/(0.625+0.21) = $6 (~5.99)
price increased paid by suppliers = $8*0.21/0.625 = $2
tax revenues = $8*78000 = $624,000
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