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Scott, MIT Graduate
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Suppose that a market is described by the following supply ...

Customer Question

Suppose that a market is described by the following supply and demand equations.

Q^S=2P
Q^D=300-P

a. Solve for the equilibrium price and the equilbrium quantity
b. Suppose that a tax of T is placed on buyers, so the new demand equation isQ^D=300-(P+T). Solve for the new equilibrium. What happens to the price received by sellers, the price paid by buyers, and the quantity sold?
C. Tax Revenue is T x Q. Use your answer to the part (b) to solve for tax revenue as a function of T. Graph this relationship for T between 0 and 300.
D. The deadweight loss of a tax is the area of the triangle between the supply and demand curve. Recalling that the area of a triangle is 1/2 x base x height, solve for deadweight loss as a function of T. Graph this relationship for between 0 and 300. ( HINT: Looking sideways, the case of the deadweight loss triangle is T, and the height is the difference between the quantity sold with the tax and the quantity sold without the tax.

Edited by Customer on 12/11/2006 at 12:20 AM
Submitted: 10 years ago.
Category: Homework