Question

Suppose a market is characterized by the following supply and demand equations:

QD=1,000-5P

QS=-500+10P

1.)Determine equilibrium price and quantity.
2.)Suppose that the government taxes production such that for every unit produced, sellers must pay the government $10. Determine the new equilibrium price(s) and quantity.
3.)Suppose that instead of taxes, the government imposes a price floor such that the minimum amount the good can be sold for is $150. Determine the new equilibrium price and quantity.
4.)Determine producer surplus, consumer surplus, and total surplus under parts A), B) and C). Are producers or consumers better off under either form of government intervention? How do you know?

Answer 1

Consumers will be worse off in each type of government intervention because their surplus falls but producer surplus will be better off in case of price floor but worse off in case of tax imposition.