Not sure if this will help!!

Assume the demand function for basketballs is given by QD = 150 - 3P + 0.1I, where P
= price of a basketball and I = average income of consumers. Also, assume the supply
of basketballs is given by QS =2P. What if a 20% income tax is introduced?
1. Before the tax, the equilibrium price is $60, and 120 basketballs are traded.
The introduction of an income tax would have no effect on the equilibrium
price net of the tax and quantity.
2. Before the tax, the equilibrium price is $60, and 120 basketballs are traded. Once the
income tax is introduced, the price would decrease by $6, and only 108 basketballs
would be traded.
3. Before the tax, the equilibrium price is $60, and 120 basketballs are traded. Once the
income tax is introduced, the price would decrease by $6, which would cause the
quantity of basketballs traded to increase.
4. Before the tax, the equilibrium price is $60, and 108 basketballs are traded. Once the
income tax is introduced, the price would decrease by $6, and only 120 basketballs
would be traded.
The income tax goes to the government and has no effect on the net price,

QD=150-3(P+.20)+0.1I
QS=2(P+.20)

QD=QS
Equilibrium Analysis

In the market for any particular good X, the decisions of buyers interact simultaneously with the

decisions of sellers. When the demand for good X equals the supply of good X, the market for

good X is said to be in equilibrium. Associated with any market equilibrium will be

an equilibrium quantity and an equilibrium price. The equilibrium quantity of good X is that

quantity for which the quantity demanded of good X exactly equals the quantity supplied of

good X. The equilibrium price for good X is that price per unit of good X that allows the market to

“clear”; that is, the price for which the quantity demanded of good X exactly equals the quantity

supplied of good X. The determination of equilibrium quantity and price, known asequilibrium

analysis, can be achieved in two different ways: by simultaneously solving the algebraic

equations for demand and supply or by combining the demand and supply curves in a single

graph and determining the equilibrium price and quantity graphically.

The algebraic approach to equilibrium. The algebraic approach to equilibrium analysis is to

solve, simultaneously, the algebraic equations for demand and supply. In the example given

above, the demand equation for good X was 

and the supply equation for good X was 

To solve simultaneously, one first rewrites either the demand or the supply equation as a

function of price. In the example above, the supply curve may be rewritten as follows:  

Substituting this expression into the demand equation, one can solve for the equilibrium price:  

The equilibrium price of good X is found to be $2. Substituting the equilibrium price of 2 into the

rewritten supply equation for good X, one has: 

The equilibrium quantity is found to be 4 units of good X.

A graphical depiction of equilibrium. The graphical approach to equilibrium analysis is

illustrated in Figure 1  . The equilibrium price and quantity are determined by the intersection of

the two curves. The equilibrium quantity is 4 units of good X, and the equilibrium price is $2 per

unit of good X. This result is the same as the one obtained by simultaneously solving the

algebraic equations for demand and supply. 

Figure Equilibrium in the market for

1 good X
A price of $2 and a quantity of 4 units of X are the equilibrium price and quantity only when the

demand and supply for good X are exactly as depicted in Figure 1  . If either the demand curve or

the supply curve shifts, the equilibrium price and quantity change. Examples of shifts in the

demand and supply curves and the resultant changes in equilibrium are illustrated in

Figures 2  (a) and 2  (b). In Figure 2  (a), a shift to left of the demand curve, from DA to D B, leads

to a decrease in both the equilibrium price and quantity of good X, while a shift to the right of

the demand curve, from DA to D C , leads to an increase in both the equilibrium price and quantity

of good X, assuming supply is held constant-the ceteris paribus assumption. In Figure 2 (b), a

shift to the left of the supply curve, from SA to SB, leads to an increase in the equilibrium price of

good X but a decrease in the equilibrium quantity of good X, assuming demand is held constant.

A shift to the right of the supply curve, from SA to SC , leads to a decrease in the equilibrium price

of good X but an increase in the equilibrium quantity of good X, again assuming that demand is

held constant. 

Figure Changes in Equilibrium

2
Qs = 10/3P - 15Qs
Qs(1 + 15) = 10/3p
Qs = 10/3(1 + 15)P
The dearivate of the supply function decrease when we apply an income tax-number 4.

If the market for basketballs is perfectly competitive and the average income is equal to $1,500,
what are the equilibrium price and quantity? At a higher price with the same above equations you
cannot have another equilibrium. The equations would change as well. In the above example the
equilibrium price is $60 dollars while the equilibrium quantity supplied and demanded is 120. If the price
becomes 60 + 12 or 72 the demand will go down to 12 , while the quantity supplied will be 80 units.

2. Assume Pollutex Inc. produces paper in its plant located on Lake Ontario, half a mile away
from CleanAir Camping. Pollutex employs an obsolete production process, dumping scum in the
lake. The camp has experienced a steady decline in the number of attendees since Pollutex
moved nearby. In particular, the owners forecast that CleanAir Camping will generate a profit of
only $50,000 a year in the future, which is $150,000 less than the one generated before Pollutex
moved nearby. A cleaner production process is available, which would not require dumping the
scum in the lake. However, converting the plant would increase yearly costs by $100,000. Is the
current situation Pareto efficient?
Answer
Yes because there is no alternative that would make CleanAir better off without hurting
Pollutex and vice versa.
No, as Pollutex could convert its plant and make CleanAir better off by $150,000.
No. In fact, CleanAir owners could pay Pollutex a sum between $100,000 and $150,000 a year to
convert its plant and increase profits between $0 and $50,000.
No. In fact, Pollutex owners could pay CleanAir a sum between $100,000 and $150,000 a year to
convert its plant and increase profits between $0 and $50,000.

Pareto Effect
u Pareto Efficient Allocation: Each individual is on the highest possible indifference curve,
given the indifference curve of the other individual.