MGEC: Async Session
Practice Problems Answer Key
Practice Problem 1
The demand for rutabagas is Q = 2,000 – 100P and the supply of rutabagas is Q = -100 + 200P. The
government imposes a $2 per unit tax on the sale of rutabagas.
a) How much is the economic incidence of this tax for buyers?
Equilibrium price and quantity without tax, can be calculated by equating the given demand and supply
equations;
2,000 − 100𝑃 = −100 + 200𝑃
𝑃 = $7
Equilibrium quantity can be found by plugging price into either the demand or the supply equation; Q =
1300 units of rutabagas
Tax: $2 per unit on sale of rutabagas. Economic incidence of on the buyer or the supplier remains same
irrespective of whether the tax is imposed on the demand side or the supply side.
Let us suppose that the tax is imposed on the sellers. The new supply curve can be rewritten as: Q = -100
+ 200 (P-2)
The new equilibrium price and quantity with tax, can be calculated by equating the given demand and
