Question

Suppose that the market for green tea can be described by the following demand and supply curves (prices are per kg):

Qd = 260 − 5P QS = 8P

a) Find the market equilibrium in the absence of taxes. Draw the demand and supply curves, labelling all intercepts and the market equilibrium

b) Draw the curves as in the last item, showing clearly the areas representing the consumer surplus (CS) and the producer surplus (PS). Calculate their values and the value of the total surplus (TS).

c) Suppose now that the government decides to tax green tea by $13 per kg. Calculate the tax equilibrium.

d) Calculate and show on the graph the values of CS, PS, T AXR, DW L.

Answer 1

" Egn is achieved when osaos есо - Y=& 8P 2605 131 p=20 40=8120)=160 260 6) 0 120 160 1 x 32x160-2560 + 160 160x20= 1600 Consumer surplus = Producer suplus - TS = 4160 tak of $13 Os=8Ps = 8(PB-13) = BPB-day c) O A=260-5PB En do=es PB = 364 13 = 260-5PB = 893-loy & Ps= 28-13=15 a osy = 8 (15)=120 2 x 120x24 = 1440 area ABC = Consumer suplus = Producer surplus= bx noxis = 900 Dwl=1x 40 x 13=260 Tax revenue = 1381207260