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 is the equilibrium price and quantity? What if a 20 percent income tax is introduced?

Question

A. 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.
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, which would cause the quantity of basketballs traded to increase.
C. 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.
D. 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.

Answer 1

Answer: D