Question

Qd= 20-2P and Qs= 3P.

a) Draw the demand and supply curves.

b)What is the equilibrium point.

c) Computer initial Consumer Surplus, CS0. Show work.

d) Computer initial Producer Surplus, PS0. Show work.

e) Computer initial Total Surplus. TS0. Show work.

f) Supposed a $5 tax, T=5, has been levied on consumers. (i) Compute the new demand curve (ii) Draw the new demand curve in (a).

g) Compute the DWL of the consumer and the producer after tax.

h) Compute the tax revenue generated by the $5 tax.

i) Compute the producer surplus, CS1, after the $5 tax has been enforced.

j) Compute the producer surplus, PS1, after the $5 tax has been enforced.

Answer 1

Setting QD=QS

20-2P=3P

20=3P+2P

P=20/5 = 4

Q=20-2(4) = 12

a) Find Y axis intercepts

When QD=0,P=20/2 =10

When QS=0,P =0/3 =0

b) Equilibrium point is denoted by letter E

c) Initial CS = 0.5*12*(10-4) = 36

d) Initial PS = 0.5*12*(4-0) = 24

e) TS = CS+PS = 36+24 = 60

f) A tax on consumers will shift the demand curve to the left by $5 at each price level.

as shown by the new demand curve D2

g) DWL of consumer = 0.5*(12-5)*(7-4) = 10.5

DWL of the producer = 0.5*(12-5)*(4-2) = 7

Total DWL = 17.5

h) Tax revenue = 5*5 = 25

i) CS after the tax = 0.5*5*(10-7) = 7.5

j) PS after the tax = 0.5*5*(2-0) = 5