Question

Suppose that demand for chicken cesar salad can be expressed by (the normal) demand function: Q=10-P. Further Suppose that the (normal) supply function can be expressed: Q=2P-2.

Graph the Situation.

1. What is the initial equilibrium price?

2. What is the initial equilibrium quantity?

3. Suppose that a tax of $3/salad is levied on the producer. What will be the new price paid by consumers after the tax?

4. What will be the new price received by the producer after the tax?

5. What will be the tax revenue collected from this tax?

6. What is the deadweight loss associated with this tax?

7.By how much was consumer surplus reduced because of the tax?

8. By how much was producer surplus reduced by this tax?

Answer 1

Sol : 1. Demand = Supply

10 - P = 2P - 2

12 = 3P

$4 = P ( Equilibrium Price)

Sol : 2. Q = 2P - 2

    = 8 - 2 = 6 (Equilibrium quantity )

Sol 3 : New Price paid by the consumer is $6 { q = 10 - P , Q = 4 , P = $ 6)

Sol 4: New price received by the producer after tax = $3 ( $6 consumer pays - $3 Tax)

Sol 5 : Tax revenue collected = 4 x 3 = $12

Sol 6 : Deadweight loss = 2 x 3 = $6

Sol 7 : Consumer loss is reduced by = $12 ( $2 x 6 = $12)

Sol 8 : Producer surplus reduced by = $6 ( $1 x 6 )