Question

Suppose that a specific tax of $3 is imposed on producers of hairspray. The hairspray market supply is Qs = 10 + 0.5P and the hairspray demand is Qd = 100-P. What is the change in the equilibrium quantity of hairspray induced by the tax incidence?

Answer 1

The change in the equilibrium quantity of hairspray induced by the tax incidence is -0.5 units.

Step-by-step explanation:

To determine the change in equilibrium quantity of hairspray induced by the tax incidence, we need to find the new equilibrium quantity after the tax is imposed.

First, we can find the equilibrium quantity and price before the tax by setting the quantity supplied equal to the quantity demanded:

Qs = Qd

10 + 0.5P = 100 - P

Simplifying the equation, we get:

1.5P = 90

P = 60

Substituting the price back into the demand equation, we can find the equilibrium quantity:

Qd = 100 - P

Qd = 100 - 60

Qd = 40

So, the equilibrium quantity before the tax is 40.

After the tax, the price received by producers will reduce by the amount of the tax, which in this case is $3. So the new price received by producers will be $57 ($60 - $3).

Now, we can substitute the new price into the original supply equation to find the new equilibrium quantity:

Qs = 10 + 0.5P

Qs = 10 + 0.5(57)

Qs = 39.5

Therefore, the change in the equilibrium quantity of hairspray induced by the tax incidence is -0.5 units (39.5 - 40).