Suppose You Are an Aide to a U

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and . a.Graph the supply and demand curves. b.What are the equilibrium quantity and equilibrium price? c.How much consumer surplus exists in this market? d.If a $2 excise tax is levied on this good, what will happen to the equilibrium price and quantity? e.What will the consumer surplus be after the tax? a.See Figure 2-17. Figure 2-17 b.Equilibrium quantity and price are 100 units and $80, respectively. c.Consumer surplus = 1/2(100 - 80) x (100) = $1,000. d.Note that before the excise tax, the inverse supply function is P = 30 + .5Q<sup>s</sup>.A $2 excise tax shifts the inverse supply function up by the amount of the tax, so the inverse supply function after a $2 excise tax must be P = 32 + .5 Q<sup>s</sup>.This means that the supply function after the tax is Q<sup>s</sup> = 2P - 64 (Note that this expression is equivalent to Q<sup>s</sup> = 2 (P-2) - 60, since the producer must pay $2 to the government for each unit sold).The demand function remains unchanged at Q<sup>d</sup> = 500 - 5P.Setting Q<sup>s</sup> = Q<sup>d</sup> and solving for price, we obtain P = $80.57.Plug this price into either the demand or supply function yields the equilibrium quantity, Q = 97.14. e.Consumer surplus (post tax) = 1/2(100 - 80.57) x (97.14) = $943.72.

and

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a.Graph the supply and demand curves.
b.What are the equilibrium quantity and equilibrium price?
c.How much consumer surplus exists in this market?
d.If a $2 excise tax is levied on this good, what will happen to the equilibrium price and quantity?
e.What will the consumer surplus be after the tax?
a.See Figure 2-17.

Figure 2-17
b.Equilibrium quantity and price are 100 units and $80, respectively.
c.Consumer surplus = 1/2(100 - 80) x (100) = $1,000.
d.Note that before the excise tax, the inverse supply function is P = 30 + .5Q^s.A $2 excise tax shifts the inverse supply function up by the amount of the tax, so the inverse supply function after a $2 excise tax must be P = 32 + .5 Q^s.This means that the supply function after the tax is Q^s = 2P - 64 (Note that this expression is equivalent to Q^s = 2 (P-2) - 60, since the producer must pay $2 to the government for each unit sold).The demand function remains unchanged at Q^d = 500 - 5P.Setting Q^s = Q^d and solving for price, we obtain P = $80.57.Plug this price into either the demand or supply function yields the equilibrium quantity, Q = 97.14.
e.Consumer surplus (post tax) = 1/2(100 - 80.57) x (97.14) = $943.72.

Suppose You Are an Aide to a U

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