3. The demand for ice cream is given by Q D = 20 2 P , measured in gallons of ic

ID: 1133060 • Letter: 3

Question

3. The demand for ice cream is given by QD = 20 2P, measured in gallons of ice cream. The supply of ice cream is given by QS = 4P 10. Suppose that government legislates a $1 tax on a gallon of ice cream, to be collected from the buyer. As a result of the tax, what happens to the price paid by buyers and the price received by sellers? The price paid by buyers rises by $0.33, while the price received by sellers falls by $0.67. The price paid by buyers rises by $1.00, since the tax is applied to them. The price paid by buyers rises by $0.50, while the price received by sellers falls by $0.50. The price paid by buyers rises by $0.67, while the price received by sellers falls by $0.33. 3. The demand for ice cream is given by QD = 20 2P, measured in gallons of ice cream. The supply of ice cream is given by QS = 4P 10. Suppose that government legislates a $1 tax on a gallon of ice cream, to be collected from the buyer. As a result of the tax, what happens to the price paid by buyers and the price received by sellers? The price paid by buyers rises by $0.33, while the price received by sellers falls by $0.67. The price paid by buyers rises by $1.00, since the tax is applied to them. The price paid by buyers rises by $0.50, while the price received by sellers falls by $0.50. The price paid by buyers rises by $0.67, while the price received by sellers falls by $0.33.

Explanation / Answer

The correct option is The price paid by buyers rises by $0.67, while the price received by sellers falls by $0.33.

QD = 20 2P and QS = 4P 10

20 2P=4P 10

6P = 30, P=5 and Q=20-10=10

The old equilibrium inersection is a Q=10 and P=5

New Equilibrium at Q=8.67 and P=4.67, this implies that the price received by the supplier is 0.33 lesser than before tax.

Also at Q = 8.67, 8.67=20-2P

2P= 11.33, P=5.67 which means that buyers pay 0.67 higher than before tax