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IAI Actuarial Core Principles · Business Economics · Relationship between the government and the individual firm

In a market, demand is Qd = 200 - 2P and supply is Qs = 3P - 50 (P in rupees). The government imposes a tax of Rs 10 per unit on producers. What is the price paid by consumers after the tax?

Consumers pay Rs 56. Setting demand equal to supply with producers receiving price minus Rs 10 gives 200 - 2P = 3(P - 10) - 50, so P = 56. The tax raises the consumer price by Rs 6, with producers bearing Rs 4.

  1. ARs 50
  2. BRs 54Correct
  3. CRs 56
  4. DRs 60
  5. Rs 52

Explanation

Before tax: 200-2P = 3P-50 gives P=50. With the tax, producers receive Pc-10, so 200-2Pc = 3(Pc-10)-50 = 3Pc-80, giving 280=5Pc, so Pc=56. Check: Qd=88, Qs=3(46)-50=88. Consumers pay Rs 56, not Rs 54 (which is a mistaken 40% pass-through).

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