Question
The market for smartphone applications is characterized by the following demand and supply curves. QD=D(P)=5P^(2) QS=S(P)=1280P^(2) (a) Calculate the equilibrium price and quantity for this
The market for smartphone applications is characterized by the following demand and supply curves.
QD=D(P)=5P^(2)
QS=S(P)=1280P^(2)
(a) Calculate the equilibrium price and quantity for this market.
(b) The government is concerned with the amount of time that youth are on their phones and is considering introducing a per unit tax ofton each smartphone application that is purchased. Sellers of the tax are legally required to pay the tax. Using the equilibrium conditions,D(P) =S(Pt) =Q, derive an equation for the effect of this tax on the equilibrium price in this market in terms of the elasticity of demandedand the elasticity of supplyes. [6 marks]
(c) Suppose that the unit excise tax is set att= 1. What is the excess burden of this tax per dollar of revenue raised?
(d) Suppose that we incorrectly assumed that supply was perfectly elastic and there was no impact of the tax on the equilibrium price. Would EB/Tax Revenue be higher or lower than what you calculated in part (c)?
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