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

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 P6Q, where Qs 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

Option (4).

In pre-tax equilibrium, demand price equals supply price at a common quantity.

60 - 4Q = 6Q

10Q = 60

Q = 6

P = 6 x 6 = $36

After $20 tax on consumers, demand falls by $20 at every output level, shifting demand curve leftward by $20. New demand function becomes

P + 20 = 60 - 4Q

P = 40 - 4Q

Equating with supply price,

40 - 4Q = 6Q

10Q = 40

Q = 4

P = 40 - (4 x 4) = 40 - 16 = $24 (Price received by producers)

Price paid by consumers = $24 + $20 = $44

Consumers pay extra $(44 - 36) = $8 and producers receive $(36 - 24) = $12 less per unit.

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