Skip to main content

Calculating impact of a tax - example


Assume a linear demand function of the form:

Qd = 120 - 5P

and a linear supply curve of the form:

Qs = -30 + 10P

Using these demand and supply functions, answer the following questions. Once you have had a go at the questions, follow the link below to compare your answers.

  1. Calculate the quantities demanded and supplied for prices from $3 - $15.
  2. Plot these figures to give the demand and supply curves for the product.
  3. Using simultaneous equations, calculate the equilibrium price and output.
  4. If the government imposes a specific tax per unit of $3, plot the new supply curve on the original supply and demand diagram.
  5. Use the diagram to find out the new equilibrium price and quantity.
  6. Calculate the tax revenue received by the government.
  7. Calculate the revenue received by the firms:
    1. before the tax
    2. after the tax
  8. Calculate consumer expenditure:
    1. before the tax
    2. after the tax