Consider a perfectly competitive market with a market demand

Consider a perfectly competitive market with a market demand function of P-10-Q and a supply function P-Q. Consider a per unit tax of t-2. Which of the following is true? O The quantity traded in this market equals 2. O The quantity traded in this market equals 4. O The quantity traded in this market equals 8. O The quantity traded in this market equals 10. O none of the above.

Solution

Demand function, P = 10 - Q

Supply function, P = Q

Due to tax of $ 2 per unit the price per unit will increase by $2 per unit. The supply curve will shift to its left.

Thus new supply curve will be

P = Q + 2

New equilibrium will be

10 - Q = Q + 2

2Q = 8

Q* = 4 units.

The quantity traded in the market equals 4.

2. P = 10 - Q

Supply function, P = Q

Due to subsidy of t=$4 per unit (the price will reduce by $4 per unit) the supply curve will shift to its right. Therefore new supply curve will be

P = Q - 4

New equilibrium will be

10 - Q = Q - 4

2Q = 14

Q* = 7

The quantity traded in this market equals 7.