Chapter 1 Practice A  Answers
1. Let the demand and supply for rental cars in Dallas be defined as (price is a daily rate):
Demand:
Q = 100P + 8000
Supply:
Q = 50P – 250
a. Graph the demand and supply curves and calculate the equilibrium price.
P
80
S
55
D
5
2500
8000
Q
To graph, solve for the inverse equations:
Demand:
P = 80 – (1/100)Q
Supply:
P = 5 + (1/50)Q
To solve for equilibrium, set Q = Q
(or P = P using the inverse equations)
100P + 8000 = 50P 250
P
E
= $55
Then plug P
E
into either equation to find Q
E
= 2500.
b. Suppose a $10 sales tax is imposed on car rentals in Dallas.
Calculate the new equilibrium
P and Q.
Indicate the new situation on your graph.
What is the economic incidence of the
tax?
That is, how much does the price that consumers pay for car rental change and how
much does the price suppliers receive change after the tax is put into effect?
P
80
S
70
Price demanders pay = $58.30
55
Price suppliers receive = $48.30
D'
D
5
2167
2500
7000
8000
Q
A $10 sales tax changes the demand curve to:
P = 70 – (1/100)Q.
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Solve for the new equilibrium using the same method as above, so that Q
E
= 2167 and
P
E
= $48.30
.
This is the price that suppliers receive, but demanders have to pay:
P
E
+ sales tax = $58.30.
To calculate the economic incidence of the tax, compare the price paid by demanders
before the tax to the price paid after.
Also compare the price received by suppliers
before the tax to the price received after.
Since the original price was $55, demanders
pay $3.30 of the tax while suppliers pay $6.70.
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 Spring '12
 henryfors
 Supply And Demand

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