Question

1. Assume you are working for the US government. The president wants your department to study the clothing market. The US governments need to raise revenues from the Clothing market, and you are assigned to study the cotton shirt market. You have access to the previous data:

• If P = 20 then Quantity demanded = 80. If P = 30 then Quantity demanded = 70.
• If P = 20 then Quantity supplied = 25. If P = 30 then Quantity supplied = 40

The US government needs at least 200 dollars of revenues raised from this market. If you raise more than that the government will accept the money but the president prefers you only raise that amount. So, make sure you do not make people pay too much unless you must. (The government revenue >= 200)

1. First you try to impose a tax. You consider imposing T dollars tax on each shirt being sold. You can impose this tax on buyers or the sellers. Which one do you prefer? How much will be the tax imposed on each shirt? How much will the consumer surplus and producer surplus in this market change after you introduce this tax? (10 points)

Answer 1

Answer:-

a.)

A) Tax to be imposed on suppliers as if we impose tax from 30% to 45% that would still be a situation if consumer surplus .As price per unit of good will be 30% of $30 = %39/ unit to 45% of $30 = $43.5 .

As if tax rate increases over it for example to 50% that would not be a situation of consumer surplus because in that case producer will be in surplus over charging high rates / unit of product.

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