Determine the effective price that the consumers pay

Reference no: EM13208696

There are two ways to model a tax. We can either look at a tax increasing the costs to the consumer or producer (depending on which party physically pays the tax), or we can look at it as a wedge between the (full) price the consumer pays and the (net) revenue the firm receives.
The demand for a particular product is Q Demanded = 10 - P and the supply is Q Supplied = P

1. The total tax is $2, the taxes must sum to 2 (Consumer Tax [Tc] + Producer Tax [Tp] = 2). Using the inverse supply and demand equations solve for the equilibrium price in terms of Tp. (The tax the producer pays to Tc = 2-Tp, you can substitute this equation into the supply equation.) *Assume that Tp=0;Tc=2

2. Determine the effective price that the consumers pay (P + Tc) and the effective price that the firm receives (P-Tp).

Reference no: EM13208696

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