Suppose the market demand function for ice cream is and the market supply function for ice cream is ,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 received by sellers with the tax is
A) $2
B) $1.50
C) $1.75
D) $1.84

Question

Suppose the market demand function for ice cream is  and the market supply function for ice cream is  ,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 received by sellers with the tax is
A) $2 
B) $1.50 
C) $1.75 
D) $1.84

Quizplus · Accepted Answer

When a tax is imposed, the price received by sellers will increase, but the price paid by buyers will also increase.
The new market demand function is:
Qd = 11 - P - Tx
where Tx is the tax per gallon of ice cream.
The new market supply function is:
Qs = 2 + P
where 2 is the quantity supplied at a price of $0, which is the price received by sellers after the tax.
To find the price received by sellers, we need to solve for P in the equation:
Qd = Qs
11 - P - Tx = 2 + P
Solving for P, we get:
P = (11 - Tx - 2) / 2 = 4.5 - Tx/2
Substituting Tx = $0.50, we get:
P = 4.5 - $0.25 = $4.25
Therefore, the price received by sellers after the tax is $4.25 per gallon of ice cream. Since the tax is $0.50 per gallon, buyers will pay $4.75 per gallon. The difference between the price paid by buyers and the price received by sellers is the tax of $0.50 per gallon.

Suppose the Market Demand Function for Ice Cream Is