Question

At Equilibrium QS = QD,and there will be a unique price and quantity at this point.So substituting the values given in the question we get :

(1xp) + (-2x5) + (1/2 x 0.1) = (-2xP) + (2x40) + (-1x6)

p + (-10) + (0.05) = -2P + 80 + (-6)

p - 9.95 = -2P + 80 - 6

p + 2P = 72 + 9.95

3P = 81.95

P = 81.95/3

P = 27.3

QD = dP + eI + fT

= -2P + (2x40) + (-1x6)

= -2x27.3 + 80 - 6

= 19.4

Therefore at Equilibrium, price = 27.3 and quantity demanded and supplied = 19.4 for the given estimated parameters.

using the above solution,

By how much do the equilibrium price and quantity change, when income taxes increase by 50 per cent? Explain the involved adjustment.