N1

Suppose that there are two consumers and three firms in this economy. Demands are as follows: D1(p) = 1 p , D2(p) = 2 p . Supply curves are as follows: S1(p) = 5p, S2(p) = 3p, S3(p) = 4p.

Calculate the market demand and supply.

Suppose that the government imposes a lump sum tax of t. What is the post-tax equilibrium price that consumers pay (hint: you will get a quadratic equation. You can leave it at that, you do not need to solve the quadratic equation).

Calculate the elasticity of market demand and supply.

Corroborate that the formula we gave in lecture for the tax incidence holds. (hint: go back to the quadratic equation you obtained above. Then, guess and verify a solution based on the formula we gave in class for the market price as a function of elasticities.)