The Questions The market for soda has supply and demand curv

The Questions The market for soda has supply and demand curves given by P = 0.02Q. P = 3-0.01 Suppose the government put a tax on soda of $0.50 per can to be collected from consumers. Graph the before and after tax supply and demand curves. What is the new equilibrium price and quantity? 2

Solution

(Question 1)

After the $0.5 tax on consumers, price paid by consumers will increase and demand will fall, shifting demand curve leftward by $0.5 and every output level. New demand function will become

P + 0.5 = 3 - 0.01Qd

P = 2.5 - 0.01Qd

When Qd = 0, P = $2.5 (P-Intercept after tax)

(Question 2)

Since tax is imposed on consumers, supply curve will remain unchanged at

P = 0.02Qs

When Qs = 0, P = 0 (P-Intercept after tax)

(Question 3 and 4)

In equilibrium, after-tax demand equals supply.

2.5 - 0.01Q = 0.02Q

0.03Q = 2.5

Q = 83.33

P = 2.5 - (0.01 x 83.33) = 2.5 - 0.83 = $1.67