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Price elasticity of Demand – Problems

 Suppose demand is p = 20 – 2QD and supply is p = 2 + 2QS. The government enacts a $2 per unit tax. What is the post-tax equilibrium quantity? 

SAMPLE ANSWER:

P=20-2Qd
P=2+2Qs
Tax=$2/unit
New Supply curve =
P-2 = 2+2Qs
So, equating both the demand and new supply curve,
20-2Q=4+2Q
So, 4Q=16
So, Q = 4
So,the post tax equilibrium quantity is 4 units

  1. Suppose demand is p = 20 – QD and supply is p = 2 + QS. The government enacts a $2 per unit tax. What is the deadweight loss of the tax
  2. Suppose demand is p = 10 – 2QD. What is the price elasticity of demand at p = $6 and QD = 2?  
  3. Suppose the price elasticity of demand is 2. What is the percent change in price that lowers demand by 30%? 

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