The demand curve in a competitive market is given by P 60-4Q where P is price an

Question

The demand curve in a competitive market is given by P 60-4Q where P is price and Qd is the quantity demanded. The supply curve is P 6Q5, where Q is the quantity supplied. The government imposes a $20 per-unit tax to be legally paid by consumers Compared with the pre-tax equilibrium: Consumers pay an extra $20 per unit, Suppliers receive the same amount per unit. Consumers pay an extra $12 per unit, Suppliers receive $8 less per unit. Consumers pay an extra $10 per unit, Suppliers receive $10 less per unit. Consumers pay an extra $8 per unit, Suppliers receive $12 less per unit. Consumers pay an extra $4 per unit, Suppliers receive $16 less per unit.

Explanation / Answer

For equilibrium : Price paid by buyers and price received by seller should be equal

Pb=Ps: 60-4Q=6Q, Solving for Q, we get the equilibrium Q=6. At this quantity the market price comes out to be P=6*6=36

When a tax of $20 is imposed, it creates a wedge between the price paid by buyers and price received by sellers and this wedge equals the amount of tax.

Pb-Ps=20

60-4Q-6Q=20. Solving for Q, we get Q=4

At this quantity, the price paid by buyers is Pb=60-4*4=44 and price received by sellers Ps=6*4=24

Thus consumers pay an extra $4 per unit and suppliers receive $16 less per unit.

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