Question

Suppose that the demand curve for wheat is D(p) = 120 − 10p and the supply...

Suppose that the demand curve for wheat is D(p) = 120 − 10p and the supply curve is S(p) = 2p.

  1. Compute the consumer and producer surplus at the equilibrium. Indicate them on a clearly marked graph.
  2. Assume that the government imposes a specific tax of $2.4 on wheat, to be paid by the consumers. Compute the government revenue and the deadweight loss generated by this tax.
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Answer #1

D=120-10p

S=2p

At equilibrium, D=S

120-10p=2p

P*=120/12= $10

Q*=2*10=20

Consumer surplus=0.5(12-10)*20=$20

Producer surplus=0.5(10)(20)= $100

Tax=$2.4

D=120-10(p+2.4)= 120-10p-24

New Equilibrium

96-10p= 2p

P**= 96/12= $8

Q**= 2*8=16

Government Revenue=2.4*16=$38.4

Deadweight loss=0.5(20-16)*2.4= 2.8

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