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

Equillibrium is met when Demand equals Supply curve

Qd=Qs=Q

0.02Q=3-0.01Q

Q=100 ( At Equillibrium)

P=2 (At Equillibrium)

this equillinrium is before Tax imposition

Now tax is charged of $0.5 then consumer pays Price 2 but supplier receives price 2-0.5=$1.5

Quantity Supplied will be 1.5/0.02= 75

Hence the supply curve moves inwards by 0.5

Demand Curve will not move hence the Price intercept of Demand Curve will remain the same beofre the tax and after the tax.

Price intercept for supply curve (P-0.5) in new Case.

P-0.5=0.02Qs then Price intercept after Tax imposed will be 0.5

New Equillibrium after Tax

Qs=Qd

(P-0.5)/0.02=(3-P)/0.01

P-0.5=6-2P

3P=5.5

P=1.81

P= 0.5+0.2Q

1.81=0.5+0.2Q

1.31/0.2=Q

Q=65