# Suppose that a market is described by the following supply and demand equations: QS = 2P QD = 300

## Question:

Suppose that a market is described by the following supply and demand equations:

QS = 2P

QD = 300 – P

a. Solve for the equilibrium price and the equilibrium quantity.

b. Suppose that a tax of T is placed on buyers, so the new demand equation is

QD = 300 – (P + T).

Solve for the new equilibrium. What happens to the price received by sellers, the price paid by buyers, and the quantity sold?

c. Tax revenue is T × Q. Use your answer to part (b) to solve for tax revenue as a function of T. Graph this relationship for T between 0 and 300.

d. The deadweight loss of a tax is the area of the triangle between the supply and demand curves. Recalling that the area of a triangle is ½ × base × height, solve for deadweight loss as a function of T. Graph this relationship for T between 0 and 300.

e. The government now levies a tax on this good of $200 per unit. Is this a good policy? Why or why not? Can you propose a better policy?

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