Assume that tax of t 2 is imposed on each unit of product

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The demand and supply functions in the market of a certain good are given by:

QD = 29 - P - PB QS = -4 + 4P

Where PB is the price of a related good B. Assume for now that PB = 8.

a) Find the inverse demand and inverse supply functions. Interpret the information given by these functions. Represent this market graphically in the (Q,P) plane.

b) Find the equilibrium price and quantity for this market.

c) Suppose that a tax of t = 2 is imposed on each unit of product sold. Find the new equilibrium price and quantity. What is the percentage of tax burden that is passed on to the consumers?

d) In general, how does the equilibrium quantity of the good depend on the price of good B? Are the two goods substitutes or complements? Justify your answer.

Reference no: EM13456053

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