Econ 101
ANSWERS TO PROBLEM SET 3
Professor Wissink
Cornell University
1.(a)
At equilibrium X =X , so 5202p = 200 + 10p
Y
720 = 12p
Y
p =60 and X =400.
D
S
*
*
(b) At 50 cents, before the tax, the suppliers were willing to supply 300 gallons.
After the tax, they will only be willing to supply 300 gallons at a price of 50 + 60
= 110 cents.
To supply 200 gallons, they were asking 40 cents before the tax, they
will now ask for 40 + 60 = 100 cents after the tax.
This type of analysis will be
true at every price and quantity on the supply curve.
The market supply curve
including the tax becomes:
X = 200 + 10(p60)
OR
p = 20 + .1X + 60, where p
S
MS
MS
stands for the price along
market
supply.
(c) See graph above.
New market supply curve is S .
M
(d) Inspecting the graph and/or equations you can see that the equilibrium market price
has increased and the equilibrium quantity decreased.
However, note that the market
price is the price demanders pay.
The suppliers receive the market price minus the
tax of 60 cents.
Specifically, it’s probably best to answer this question using the
price
functions:
p = 260  .5X and now, with the tax,
p = 20+.1X + 60.
At equilibrium p = p , so
D
MS
D
MS
260  .5X* = 80 + .1X*
Y
180 = .6X*
Y
X* = 300
Y
p =
110 cents and p = 50.
Note
D
S
that demanders pay 110 cents, suppliers receive 110 cents from demanders, but
suppliers must pay the government 60 cents a gallon so that they only end up netting
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 Fall '06
 WISSINK
 Economics, Supply And Demand, Cornell University, dr. livingston, Dr. Stanley, Professor Wissink

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