Suppose that demand in a market can be represented by the following equation: í µí±ƒ=8âˆ’í µí±„ and that supply can be represented by the equation: í µí±ƒ=í µí±„ What is the equilibrium price and quantity in this market? Now suppose that a sales tax of $2 per unit is imposed on the product in this market. How would you now express the supply curve with this tax included? What are the new equilibrium price and quantity in this market? How much tax revenue is raised? Why is it less than the original equilibrium quantity multiplied by the $2 tax? What is the effect of this tax on the price consumers pay and on consumer surplus? What price do producers receive net of the tax (without the tax added)? How did this influence the quantity supplied? Calculate the deadweight loss associated with this tax. It may help you to draw a graph as you answer these questions.
