Suppose the market demand function for ice cream is Q^d = 10 - 2P and the market supply function for ice cream is Q^s = 4P - 2,both measured in millions of gallons of ice cream per year.Suppose the government imposes a $0.50 tax on each gallon of ice cream.The price paid by buyers with the tax is:

Question

Quizplus · Accepted Answer

To find the price paid by buyers with the tax, we first need to adjust the supply function to account for the tax. The tax effectively increases the cost to suppliers by $0.50 per gallon, so we adjust the supply equation by subtracting the tax from the price suppliers receive (P - 0.50). The new supply equation becomes QS = 4(P - 0.50) - 2. Simplifying this gives QS = 4P - 4. Setting the supply function equal to the demand function to find the equilibrium price with the tax, we get 10 - 2P = 4P - 4. Solving for P gives P = $2.33, which is the price before tax. The price paid by buyers includes the tax, so it remains $2.33 as the tax shifts the supply curve but does not change the final price paid by buyers directly in this calculation.

Suppose the Market Demand Function for Ice Cream Is Qd

Suppose the Market Demand Function for Ice Cream Is Q^d