Microeconomics 2nd Edition by Douglas Bernheim

Exercise 1

For the same economy as in Problem 3, suppose the government decides to levy a $ T per gallon tax on ice cream. Determine the partial equilibrium and general equilibrium effects of this tax on the prices and quantities of pie and ice cream as a function of T. Compute the derivative of the ice cream price and the pie price with respect to T , both for the partial equilibrium and the general equilibrium. Interpret the derivatives.