These next five problems consider tax incidence. Suppose the market supply and demand for guitars in Happy Valley are given by:
Demand: P = 300 – (1/2)Q
Supply: P = 100 + (1/3)Q
What is the equilibrium price and quantity of the product?
A – P* = 120, Q* = 1200
B – P* = 180, Q* = 240
C – P* = 60, Q* = 480
D – P* = 225, Q* = 150
E – none of the above
What is the price elasticity of demand at the equilibrium price?
A – Elasticity = -1
B – Elasticity = -2
C – Elasticity = -0.5
D – Elasticity = -0.666
E – none of the above
For the next three questions, assume there is $20 per unit tax levied on the consumers of guitars. What price will buyers pay after the tax is imposed?
A – $192
B – $200
C – $160
D – $190
E – none of the above
What is the quantity of the good that will be sold after the tax is imposed?
A – 196
B – 210
C – 224
D – 216
E – none of the above
What is the deadweight loss created by the tax?
A – DWL = $360
B – DWL = $120
C – DWL = $240
D – DWL = $480
E – none of the above
