Assume the Demand Function for Basketballs Is Given by Q_D

question 5

Multiple Choice

Assume the demand function for basketballs is given by Q_D = 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 Q_S = 2P.If the market for basketballs is perfectly competitive,and the average income is equal to $1,500,what is the equilibrium price and quantity? What if a 20 percent income tax is introduced?

• A)Before the tax,the equilibrium price was $60,and 120 basketballs were traded.The introduction of an income tax would have no effect on the equilibrium price and quantity.
• B)Before the tax,the equilibrium price was $60,and 120 basketballs were 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 was $60,and 120 basketballs were 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 was $60,and 108 basketballs were traded.Once the income tax is introduced,the price would decrease by $6,and only 120 basketballs would be traded.