Suppose in a market the demand function is: QD=50-3P and the supply function is: QS=2P.

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Suppose in a market the demand function is: QD=50-3P and the supply function is: QS=2P. Assume for now that there are no externalities or pre-existing market distortions, so these represent the true social marginal benefit and marginal cost curves. The government decides to raise revenue by imposing a $5 tax on every unit purchased.

iii) Now assume that the tax is collected from buyers and hence shifts the demand curve down.However,buyer’s don’t feel the full saliency of the tax and their demand function once the tax is imposed is: QD=50-3P-1.5T where T is the unit tax.

iv) In a second graph,draw the original demand and supply curves and shifting demand down by only $2.5 illustrate the price received by sellers (the market price in this case) and the equilibrium quantity after the tax is imposed.

v) Using the comparative statics formulas and noting that the partial derivative of demand respect to the tax is now 1.5 instead of 3 find the net price received by sellers. Adding $5 to this, find the gross price paid by buyers.

Regarding part V, how is the partial derivative 1.5? Also, is the reference to “3” from Q’D=-3?

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