Question

Local coffee Demand can be characterized by two types of people: Low demanders with QDL = 12 - 2PX, and high demanders with QDH = 16 - PX. The market supply curve here is QS = 600PX, supplied by many many firms. a) If there are 80 low demanders and 40 high demanders in this market, what will be the equilibrium price and quantity? What is the Consumer and Producer Surplus? b) If the Government imposes a $1 coffee tax, what will the new equilibrium be? c) If the Government is interested in maximizing tax revenue, what should the tax be? [Be very careful with how you add up the demand curves here. The market demand curve you need to derive in (a) will not be a single straight line, it'll have a kink in it. You should get a number between 1000 and 1500 in (a) for Quantity sold!]

Answer 1