Assume the Demand Function for Basketballs Is Given by QD

question 18

Multiple Choice

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. If the market for basketballs is perfectly competitive, and the average income is equal to $1,500, what are the equilibrium price and quantity? What if a 20% income tax is introduced?

• A) 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.
• B) 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.
• C) 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.
• D) 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.

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Definitions:

Null Hypothesis

The hypothesis that there is no significant difference between specified populations, any observed difference being due to sampling or experimental error.

Alpha

The threshold of probability at which the null hypothesis is rejected in statistical testing, often set at 0.05.

Statistical Significance

Indicates the likelihood that a result or relationship is caused by something other than mere chance.

Statistical Probability

The quantification of the likelihood of an event occurring based on a ratio of favorable outcomes to the total number of possible outcomes.