Suppose the Market for Dry Cleaning Has an Inverse Demand

Multiple Choice

Suppose the market for dry cleaning has an inverse demand of P = 10 - 0.15Q and an inverse supply curve (MC) of P = 0.05Q, where P is the price per article of clothing and Q is the quantity of clothing laundered. Suppose the external marginal cost of dry cleaning is $1. If the government tries to correct the negative externality by placing a $1 tax on each laundered piece of clothing, buyers will pay _____ and sellers will receive _____, net of the tax.

A) $3; $2
B) $4.75; $5.75
C) $5; $4
D) $3.25; $2.25