How do I calculate the following problem?
Equilibrium is set at 50 units of quantity and $50.00 in price. How do I calculate the price received by producers after paying the tax and the price the consumer pays after the tax is imposed?
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For most products the number of items buyers are willing to buy increases as the price decreases, on the other hand the number of items sellers are willing to sell increases as the price increases. The relation between demand/supply and price could be linear or the two could be related by a more complex function. At the equilibrium price, the demand for the product is equal to the supply.
In the problem, the equilibrium price of a product is $50 and the equilibrium quantity is 50. The rate of taxation is not provided. When a tax is applied, it can be borne by the sellers in which case, the price at which the product is sold is reduced by the seller. Or the seller could maintain the price and the tax is an additional amount that the buyer would have to pay for the product.
If the rate of taxation is X% and the price paid by the buyer remains at $50, the amount received by the seller is equal to 50/(1+X/100). On the other hand, if the taxes have to be paid for by the buyer, for each item sold, the seller receives $50 but the buyer has to pay $50*(1+X/100).
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