Question

 Demand:𝒑𝒅 =𝟕𝟐−𝟏.𝟐𝟓∗𝒒𝒅

 Supply:𝒑𝒔 =𝟏𝟐.𝟓+𝟐.𝟐𝟓∗𝒒𝒔

Imagine now that the government imposes a tax of $𝟒. 𝟓 on the producers of hammers.

a) What is the new equilibrium quantity?

Answer 1

At equilibrium, $p_{d}$ =$q_{s}$ and $q_{d}$ =$q_{s}$ , demand= supply

71 - 1.25$q_{d}$ = 12.5 + 2.25$q_{s}$

$\frac{3.5q}{3.5}$ = $\frac{59.5}{3.5}$

q = 17 which is the equilibrium quantity

$p_{d}$ = 72 - ( $1.25\times17)$

$p_{d}$ =$ 50.75 (equilibrium price)

Imposition of tax will increase the equilibrium price and thereafter the new price will be;

p= $50.75+$4.5 =$ 55.25

the demand function is,$p_{d}$ = 72-1.25$q_{d}$

Replacing p_d with the new price we have,

55.25 = 72 - 1.25 $q_{d}$

$q_{d}$ = $13.4(new equilibrium quantity)