Consider a partial equilibrium economy with utility function…
Consider a partial equilibrium economy with utility function U(m, q) = m + q^(1/3) and production function f(x) = x^(1/4). A 50% ad-valorem tax is collected from the producer. The consumer’s inverse demand remains p = (1/3)*q^(-2/3) and the taxed inverse supply is p = 8q^3. Setting demand equal to taxed supply and solving, the equilibrium quantity under the tax q_tau is:
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