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:

Net Worth

The total value of an individual's or organization's assets minus liabilities.

Consumption

The use of goods and services by households, considered as the end component of economic activity where goods or services are utilized.

Vertical Equity

A principle of taxation that posits taxpayers with higher incomes should pay more in taxes than those with lower incomes, based on the ability to pay.

Tax Burdens

The total amount of taxes paid by an individual or entity, often expressed as a percentage of income or as an absolute amount.