Q1) Equilibrium effects of per unit sales tax. We also illustrated effects graphically, and identified tax revenue. For this problem, assume you are economic advisor in charge of trying to raise maximum level of tax revenue for government. You consider taxing suppliers in market for corn, major agricultural product in United States. Assume consumer demand for corn is:
qd = 200 - 50pd
and supply is
qs = 50ps
Your ultimate goal is to solve for tiny_mce_markeramp;tau, per unit tax that maximizes revenue.
a) Solve for equilibrium quantity and price, after tax has been imposed. (Hint: Remember in equilibrium, qd = qs. However, ps = pd - τ when a tax exists. Substitute for ps, then solve for equilibrium. You answers will be a function of &tau.
b) Noting that tax revenue is T, we know T = τQ. Using your answer from (a), substitute for Q and prepare the resulting expression.
c) Set up your optimization problem. Include all parts as we have done in lecture.
d) Finally, solve for τ*, the optimal per unit tax.
Although it is not required, diagram showing the effects of tax is helpful.