Consider the following demand and supply functions in a competitive market for automobiles. 𝐷(𝑝) = -0.01𝑝 + 50 and 𝑆(𝑝) = 50𝑝 1. What is the equilibrium price and quantity in this market? 2. What is the price elasticity of supply? The price elasticity of demand? 3. Suppose that the government introduces a unit tax of t = $0.25 for each unit sold that must legally be paid by buyers. What is the impact of this tax on the equilibrium price paid by buyers? The equilibrium quantity? 4. Does the buyer or seller bear a greater burden of the tax? Why?
Added by David M.
Step 1
To find the equilibrium price and quantity, we need to set the demand equal to the supply: -0.01𝑝 + 50 = 50𝑝 Solving for 𝑝: -0.01𝑝 - 50𝑝 = -50 -0.01𝑝 - 50𝑝 = -50 -50.01𝑝 = -50 𝑝 = -50 / -50.01 𝑝 ≈ $1 Substitute 𝑝 back into either the demand or supply function Show more…
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