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April 23rd, 2017, 07:13 PM  #1 
Member Joined: Mar 2017 From: Israel Posts: 70 Thanks: 2  Microeconomics
Hello Can you help me please about the following exercise: Demand function is Q = 400  P Supply function is Q = 3P How much of tax for per unit of product should be set for make that the quantity will be reduced by x2? (x is a multiplication). My answer is : 400  P = 3P P = 100  400  P = 3P 400  P = 0.5*3P P = 160  The tax is: 160  160 = 100 I am not sure about my answer. Thanks! 
April 24th, 2017, 03:57 AM  #2  
Senior Member Joined: May 2016 From: USA Posts: 1,038 Thanks: 423  Quote:
What is that quantity? Now we get to the point of the exercise. What concerns the seller is what she gets EXCLUDING the tax because the tax goes to the state, not the seller. What concerns the buyer is what he pays INCLUDING the tax because both the amount received by the seller and the amount received by the state come out of the buyer's pocket. Understand that? Can you set up the second part of the problem now? Last edited by JeffM1; April 24th, 2017 at 04:01 AM.  
April 24th, 2017, 10:24 AM  #3  
Member Joined: Mar 2017 From: Israel Posts: 70 Thanks: 2  Quote:
I think i got you: 400  P = 3P P = 100 Q = 3P = 3*100 = 300  Q = 0.5*300 = 150  Q = 3P 150 = 3P P = 50 The tax is: 100  50 = 50 Did i understand you? Edit: or 0.5*P = 0.5*100 = 50 I'm confused. Last edited by IlanSherer; April 24th, 2017 at 10:47 AM.  
April 24th, 2017, 11:18 AM  #4 
Senior Member Joined: May 2016 From: USA Posts: 1,038 Thanks: 423 
Without tax, clearing occurs where $3p = 400  p \implies p = 100 \text { and } q = 300.$ If the tax reduces sales to 0.5 * 300 = 150 then the price received by the seller must equal $3p = 150 \implies p = 50$ and the price paid by the buyer must equal $400  p = 150 \implies p = 250.$ So the tax is $250  50 = 200 \ne 50.$ Why is your answer of 50 wrong? If the buyers must pay 100 but the government takes 50, the suppliers will provide only 150 units as you saw, but the buyers will still demand 300. No equilibrium. If the buyers must pay 150 and the government takes 50, the suppliers will get 100 and still supply 300, but the buyers will demand only 250. No equilibrium. If the buyers pay 250, they will buy only 400  250 = 150. If the sellers receive 50, they will supply 3 * 50 = 150. Equilibrium. Notice that the tax of 200 is borne as follows: sellers get 50 less and the buyers pay 150 more. 
April 24th, 2017, 11:51 AM  #5  
Member Joined: Mar 2017 From: Israel Posts: 70 Thanks: 2  Quote:
 

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