Question

suppose the market for dry cleaning has an inverse demand of P = 10 â€" 0.15Q and an inverse supply curve (MC) of P = 0.05Q, where P is the price per article of clothing and Q is the quantity of clothing laundered. Suppose the external marginal cost of dry cleaning is $1. If the government tries to correct the negative externality by placing a $1 tax on each laundered piece of clothing, buyers will pay _____ and sellers will receive _____, net of the tax.

Answer 1

The correct solution will be "$3.25; $2.25". The further explanation is given below.

Step-by-step explanation:

The $1 tax could very well start creating a wedge between some of the price that producers and consumers start receiving.

⇒
`Pd-Ps=1: 10`

to

⇒
`0.15Q-0.05Q=1`

Attempting to solve the Q, we should get Q=45 equilibrium.

The market value that customers pay will be:

=
`10-0.15* 45`

=
`3.25` ($)

The cost that customers receive will be:

=
`0.05* 45`

=
`2.25` ($)