Question

2. Suppose the market for digital music players consists of 2 types of people. One groups of consumers has an individual demand of QB = 8 − 0.02P and the other groups has an individual deman of QL = 20 − 0.01P. (a) If there are 25 consumers with a demand of QB and 15 consumers with a demand of QL, then what is the market demand curve? Illustrate it in a graph. (b) Suppose the (inverse) market supply curve is P = 0.5Q, what is the market equilibrium outcome? (Hint: Your quantity should be somewhere between 175 and 325.) What is the consumer and producer surplus in this case? (c) The government has become concerned about long term environmental harm from improper disposal of the digital music players. To alleviate some of the burden, the government decides to impose a $10 excise tax on each digital music player sold. What is the new equilibrum? How much has the government raised in tax revenue? How big is the dead weight loss?.

Answer 1