The demand for ice cream is given by Q D = 20 - 2P, measured in gallons of ice cream. The supply of ice cream is given by Q S = 4P - 10. Suppose that the government legislates a $1 tax on a gallon of ice cream, to be collected from the seller.
a) As a result of the tax, what is the price paid by buyers?
b) What is the price received by sellers?
Hint: You need to determine the consumer and producer burden of the tax. First, find the equilibrium price and quantity. Then, determine the elasticity of demand and supply. Then, use the share of the tax formula provided to you to determine the burdens. After, that you add the consumer burden to the equilibrium price to find the buyer price. Subtract the producer burden from equilibrium price to find seller price.
The demand for ice cream is given by Q D = 20 - 2P, measured in gallons of ice cream. The supply of ice cream is given by Q S = 4P - 10. Suppose that the government legislates a $1 tax on a gallon of ice cream, to be collected from the seller.
a) As a result of the tax, what is the price paid by buyers?
b) What is the price received by sellers?
Hint: You need to determine the consumer and producer burden of the tax. First, find the equilibrium price and quantity. Then, determine the elasticity of demand and supply. Then, use the share of the tax formula provided to you to determine the burdens. After, that you add the consumer burden to the equilibrium price to find the buyer price. Subtract the producer burden from equilibrium price to find seller price.
