Question

The inverse demand curve for delivery meals is: Pd=18-3Qd the inverse supply curve is: Ps=3Qs where p is price of meal in dollars, Q is quantity in thousands of meals

a.) solve for equilibrium price and quantity

b.) draw the supply and demand curves and the equilibrium outcome on axes below and label graph

c.) Calculate the consumer surplus and producer surplus in this market, and show them on the set of axes above.

d.) suppose the government imposes a tax of $1.50 on each meal. what share of the tax do consumers pay? what share of tax do producers pay?

Answer 1

a) At equilibrium, demand = supply

18 - 3Qd = 3Qs

Qd = Qs = 3

At this quantity, P = 9

b)

c) Consumer surplus would be area of portion A whose sum is (1/2) * (18 - 9) * (3 - 0) = 13.5

Producer surplus would be area of portion B whose sum is (1/2) * (9 - 0) * (3 - 0) = 13.5

d) As demand and supply have equal elasticity, burden of tax will fall equally among each other. Price paid by consumer rises to 9.75 while price received by producer fall to 8.25

Additional Information:

	Before Tax	After tax
Consumer Surplus	A + C + E	A
Producer Surplus	B + D + F	B
Government Revenue	-	C + D
Deadweight Loss	-	E + F