Suppose You Are an Aide to a U

question 127

Essay

Suppose you are an aide to a U.S.senator who is concerned about the impact of a recently proposed excise tax on the welfare of her constituents.You explained to the senator that one way of measuring the impact on her constituents is to determine how the tax change affects the level of consumer surplus enjoyed by the constituents.Based on your arguments,you are given the go-ahead to conduct a formal analysis,and you obtain the following estimates of demand and supply:
Q^d = 500 - 5P and Q^s = 2P −60.
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?

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Definitions:

Word-of-Mouth Effects

The impact of person-to-person communication on the attitudes, beliefs, and behaviors of individuals regarding products, services, or ideas.

Consumer Contamination

The notion that a product loses value in the eyes of a consumer if it is perceived as being used or touched by another person.

Bread Crumbs

A web design element that allows users to keep track of their locations within programs or documents, metaphorically derived from the fairy tale of Hansel and Gretel.

Margarine Container

A type of packaging designed to hold margarine, a butter substitute made from vegetable oils.