Answered step by step
Verified Expert Solution
Question
00
1 Approved Answer
The market for electric cars is characterized by the following demand and supply functions. QD = D(P) = 10 2P QS = S(P) = 6
The market for electric cars is characterized by the following demand and supply functions. QD = D(P) = 10 2P QS = S(P) = 6 3P (a) Calculate the equilibrium price and quantity for this market. [3 marks] (b) The government is considering introducing a per unit subsidy of t on each electric car that is purchased. Suppose that the statutory incidence of 2 this subsidy will be on buyers. Using the equilibrium conditions, D(Pn t) = S(Pn) = Q (i.e. that demand equals supply in equilibrium), derive an equation in terms of es and ed that describes what fraction of the subsidy is borne by buyers/consumers. [6 marks] (c) Suppose that the unit tax is set at t = 0.1 per unit. What is the excess burden of this tax per dollar of revenue raised? [8 marks] (d) Suppose that we incorrectly assumed that supply was perfectly elastic and there was no impact of the tax on the equilibrium price received by sellers. Would EB/Tax Revenue be higher or lower than what you calculated in part (c)? In 1-2 sentences, explain your answer. [8 marks]
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started