ECO 108 Lecture Notes - Lecture 10: Economic Surplus, Deadweight Loss, Demand Curve

11 views2 pages

peachwoodchuck721

3 Aug 2018

School

University of Rochester

Department

Economics

Course

ECO 108

Professor

landsburg

For unlimited access to Class Notes, a Class+ subscription is required.

Document Summary

Suppose the government imposes a sales tax of per pound of potatoes. At first, there is no tax and the market is in equilibrium at the old price. Once the tax is imposed, we find the new price. The new price occurs where that line touches the supply curve, and the new price plus tax occurs where that line touches the demand curve. Prior to the tax, with the old price in effect, producers earn a surplus of d + e + f (the area above the supply curve, up to the price, and out to the quantity supplied). With the tax in effect, producers earn a surplus of f. their surplus has shrunk, partly because they are selling at a lower price and partly because they are selling a smaller quantity. Prior to the tax, consumers earn a surplus of a + b + c .

Related Questions

Taxation Question (SHOW ALL WORK)

Suppose that the demand curve (hundreds) for apples is given by Qd = 140 - 5P, where Qd is the number of pounds demanded per year and p is the price per pound. The supply of apples can be described by Qs = 40 + 5P, where Qs is the number of pounds provided.

What is the equilibrium price? (Hint: At the equilibrium, quantity demanded and quantity supplied are equal, Qd = Qs.)

What is the equilibrium quantity supplied and demanded?

Calculate the consumer surplus at the equilibrium price.

Calculate the producer surplus at the equilibrium price.

Calculate the total surplus at the equilibrium price.

Now suppose that the government imposes a tax of $8 per each pound sold, paid by the producers. In this case, what are the price and the consumer surplus?

turquoiseelephant900

The market for packets of cigarettes has been described by the following supply and demand functions:

Supply: P = 10 + 4Q Demand: P = 100 - 5Q where P is the price in dollars and Q is the quantity of packets of cigarettes per month (in thousands).

Part A) Construct a graph of supply and demand for this market showing all intercepts. What are the equilibrium prices and quantities? Show these on your graph.

Part B) At the market equilibrium price, what would be the total monthly revenue?

Part C) Calculate consumer surplus at the market equilibrium and indicate this surplus as an area on your diagram.

Part D) Calculate producer surplus at the market equilibrium and indicate this surplus as an area on your diagram.

Part E) Assume that a per-unit tax of $9.00 per packet of cigarettes is imposed by the government on the suppliers of cigarettes. Depict this on your demand and supply diagram. (Hint: the new tax inclusive supply function will be: P = 19 + 4Q). What is the new market equilibrium quantity? What price will consumers now pay and what price will suppliers now receive?

Part F) How much is the government revenue from the tax on suppliers?

Part G) Calculate consumer surplus and producer surplus after the imposition of the tax and any deadweight loss associated with the tax. Indicate these surplus and tax revenue areas on your diagram. Explain what the deadweight loss represents.

Part H) Now assume that instead of imposing a per-unit tax of $9.00 per pack on the suppliers of cigarettes the government decides to apply the same per-unit tax of $9.00 on consumers. Depict this on your demand and supply diagram. (Hint: the new tax inclusive demand function will be: P = 91 - 5Q) What is the new market equilibrium quantity? What price will consumers now pay and what price will suppliers now receive? (5 marks)

Part I) How much is the government revenue from the tax on consumers? (1 mark)

Part J) Who bears the greatest burden of the tax in each case, producers or consumers? Does your answer depend on whether the tax is levied on producers or consumers?

I am really having difficulty understanding Part J - can that please be answered with some detail?

carminewildebeest911

The equation for the demand curve is D = 100 - P. That means that the intercept on the price axis is 100, and the intercept on the quantity axis is also 100. The slope of the demand curve is -1. The equation for the supply curve is S = 9*P. That means that the supply curve begins at the origin, and increases with a slope of 9. For example, if the price is $1, the quantity supplied is 9. If the price is $20, the quantity supplied is 180. If you draw these curves you will notice that the intersection of supply and demand occurs at a price of $10 and a quantity of 90. That is the market equilibrium. We will call it the autarkic equilibrium in this market.

A. What is the consumer surplus?

B. What is the producer surplus

C. Using the same information as in problems A and B, now also assume that the country can trade this product at a world price of $20. Will the country be an exporter or an importer of the product?

D. Continuing with the information in the previous problem, at a price of $20, what is the quantity demanded? Plug the price into the demand formula in problem A

E. What is the new consumer surplus when the country begins trading at a price of $20?

F. What is the new producer surplus when the country begins trading at a price of $20?

G. What is the dollar value of the gains from trade?

raspberrybear41

ECO 108 Lecture Notes - Lecture 10: Economic Surplus, Deadweight Loss, Demand Curve

Document Summary

Get access

Related textbook solutions

Principles of Economics

Principles of Macroeconomics

Principles of Microeconomics

Related Documents

ECO 108 Lecture Notes - Lecture 4: Demand Curve

ECO 108 Lecture Notes - Lecture 24: Marginal Revenue, Market Power, Economic Surplus

ECO 108 Lecture Notes - Lecture 14: Demand Curve

Related Questions