Question

Let P = 0.09q + 50 be the supply equation for a manufacturer. The demand equation for his product is:

P = 0.07q + 65
i. If a tax of N1.50/unit is to be imposed on the manufacturer, how will the original equilibrium price be affected if the demand remains the same?
ii. Determine the total revenue obtained by the manufacturer at the equilibrium point, both before and after the tax.

Answer 1

To find the original equilibrium price after the tax is imposed, we need to determine the price at which the new supply curve intersects the demand curve. The original equilibrium price before the tax was imposed was N120.75.

Step-by-step explanation:

To find the original equilibrium price after the tax is imposed, we need to determine the price at which the new supply curve intersects the demand curve. The tax of N1.50/unit imposed on the manufacturer will affect the supply equation. To account for the tax, the supply equation becomes P = 0.09q + (50 - 1.50) = 0.09q + 48.50.

To find the equilibrium price, set the supply equation equal to the demand equation:

0.09q + 48.50 = 0.07q + 65

Solving for q:

0.02q = 16.50

q = 825 units

Substitute the value of q back into either the supply or demand equation to find the equilibrium price:

P = 0.07(825) + 65 = 120.75

Therefore, the original equilibrium price before the tax was imposed was N120.75.