The market supply function for tires is Q œ  2,000  300PS , where PS is the sellers' price and Q is the quantity supplied of tires per year. The market demand function
for tires is Q œ 12,000  200PB, where PB is the buyers' price and Q is the quantity demanded of tires per year. Suppose that the government imposes a $2 specific tax
on tires. (The vertical axis measures the buyers' price, PB.)
(1) What are the equilibrium buyers' price, the equilibrium sellers' price, and
the equilibrium quantity before the tax is imposed? (5 points)
(Let P* and P* denote the pretax equilibrium buyers' price and the pretax BS*
equilibrium sellers' price, respectively, and let Q denote the pretax
equilibrium quantity.)
(2) What are the equilibrium buyers' price, the equilibrium sellers' price, and
the equilibrium quantity after the tax is imposed? (10 points)
(Let P** and P** denote the after-tax equilibrium buyers' price and
BS **
the after-tax equilibrium sellers' price, respectively, and let Q denote
the after-tax equilibrium quantity.)
(3) Draw the demand curve, the pretax supply curve, and the after-tax supply
curve in the same diagram. Illustrate the pretax equilibrium and the after-tax
equilibrium graphically. (10 points)
(4) What is the incidence of the tax on buyers (also called the burden of the tax
borne by buyers)? (5 points)
(5) What is the incidence of the tax on sellers? (5 points)
(6) What is the tax revenue collected by the government with the tire tax?