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The market demand function is D(Pd) = 160-2Pd and the market supply function is S(Ps) = Ps-14, where Pd and Ps are the prices paid by the consumers and received by the producers respectively. Also, D(Pd) and S(Ps) give the quantities demanded and supplied, respectively.
Find the market equilibrium (no-tax policy).
Suppose that the supplier is required to pay a per unit tax of t = $6. Draw a graph to show this change in policy compared to the no-tax policy. Find the equilibrium quantity and prices Pd and Ps. How much of the tax is passed on to the consumers
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Assume that we have Ricardian equivalence. This implies that consumption depends on expected life- time incomes and that individuals understand the government's intertemporal budget restriction.
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