The demand and supply schedules in the market for shoes are given in the following table — Find initial equilibrium price quantity
General StudiesGeneralWorked Solution
The demand and supply schedules in the market for shoes are given in the following table.
a. Find the initial equilibrium price and quantity.
b. Suppose the government imposes a new $1.00/unit tax on the producers of shoes. Find the new equilibrium price and quantity.
c. Senator Jones has proposed legislation that would change the shoe tax by switching it from the seller to the buyer. If the bill passes, what will be the new equilibrium price and quantity?
d. Will consumers prefer the original bill, will they prefer the Jones bill, or will they be indifferent between the two bills?
e. Will shoe producers prefer the original bill, will they prefer the Jones bill, or will they be indifferent between the two bills?
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SOLUTION
a. The initial equilibrium quantity is 400 and the initial equilibrium price is $4.
b. A tax on suppliers shifts the supply schedule by the amount of the tax. So, for example, firms supplied 100 units at a price of $2.50 without the tax but would supply 100 units at a price of $3.50 if firms have to pay a $1 tax. Quantity supplied is equal to quantity demanded at a price of $4.50. The new equilibrium quantity is 300. Firms keep $4.50 - $1.00 = $3.50 after paying the $1 tax.
c. A tax on consumers shifts the demand schedule by the amount of the tax. So, for example, consumers were willing to buy 200 units at a price of $5.00 without the tax but would demand 200 units at a price of $4.00 if they have to pay a $1 tax. The new equilibrium price is $3.50 and the new equilibrium quantity is 300. Consumers pay a total of $3.50 + $1.00 = $4.50.
d. Consumers are indifferent between the two proposals. They will pay $4.50 for shoes under both.
e. Firms are indifferent between the two proposals. They will keep $3.50 for shoes under both.