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IAI Actuarial Core Principles · Business Economics · How competitive markets operate

Demand is Qd = 200 - 2P and supply is Qs = 3P - 50 (P in rupees). The government imposes a per-unit tax of Rs 5 collected from sellers, so the supply curve becomes Qs = 3(P - 5) - 50, where P is the price paid by buyers. What is the price paid by buyers after the tax, and what share of the tax do buyers bear?

Buyers pay Rs 53 and bear Rs 3 of the Rs 5 tax. Solving 200 - 2P = 3(P - 5) - 50 gives P = 53, up from Rs 50, while sellers receive Rs 48 and bear the other Rs 2.

  1. ARs 50 and Rs 2 of the tax
  2. BRs 52 and Rs 2 of the taxCorrect
  3. CRs 53 and Rs 3 of the tax
  4. DRs 52 and Rs 3 of the tax
  5. Rs 55 and Rs 5 of the tax

Explanation

Before tax: 200 - 2P = 3P - 50 gives P = 50. After tax: 200 - 2P = 3P - 65, so 265 = 5P and P = 53. Check: 3(53-5)-50 = 94 and 200-106 = 94. Buyers pay 3 more, sellers net 48, bearing 2.

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