IAI Actuarial Core Principles · Business Economics · Government intervention in a market
Demand is Q = 100 - P and supply is Q = P - 20 (P in rupees). The government imposes a tax of Rs 10 per unit collected from sellers. What is the tax revenue?
Tax revenue is Rs 350. The tax shifts supply to Q = P - 30, giving a new equilibrium price of Rs 65 and quantity of 35 units, so revenue is 10 multiplied by 35.
- ARs 400
- BRs 450Correct
- CRs 500
- DRs 600
- Rs 350
Explanation
Pre-tax equilibrium: 100 - P = P - 20, so P = 60, Q = 40. With the tax, sellers supply Q = (P - 10) - 20 = P - 30. Setting 100 - P = P - 30 gives P = 65, Q = 35. Revenue = 10 x 35 = 350... check: 35 x 10 = Rs 350.
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