Question

Consider the market for designer purses. The following graph shows the demand and supply for designer purses before the government imposes any taxes.

First, use the black point (plus symbol) to indicate the equilibrium price and quantity of designer purses in the absence of a tax. Then use the green point (triangle symbol) to shade the area representing total consumer surplus (CS) at the equilibrium price. Next, use the purple point (diamond symbol) to shade the area representing total producer surplus (PS) at the equilibrium price.

Suppose the government imposes an excise tax on designer purses. The black line on the following graph shows the tax wedge created by a tax of $40 per purse.

First, use the tan quadrilateral (dash symbols) to shade the area representing tax revenue. Next, use the green point (triangle symbol) to shade the area representing total consumer surplus after the tax. Then, use the purple point (diamond symbol) to shade the area representing total producer surplus after the tax. Finally, use the black point (plus symbol) to shade the area representing deadweight loss.

Complete the following table by using the previous graphs to determine the values of consumer and producer surplus before the tax, and consumer surplus, producer surplus, tax revenue, and deadweight loss after the tax.

Note: You can determine the areas of different portions of the graph by selecting the relevant area

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Answer 1

Before Tax; Consumer surplus = 1/2 x base x height = 1/2 x 40 x (200 - 120) = 20 x 80 = $ 1600

Producer surplus = 1/2 x 40 x (120 - 40) = 20 x 80 = $ 1600

After Tax; Consumer surplus = 1/2 x 30 x (200 - 140) = 15 x 60 = 900

Producer surplus = 1/2 x 30 x (100 - 40) = 15 x 60 = 900

Tax revenue = (140 - 100)30 = 40 x 30 = 1200

Deadweight loss = 1/2 x (140 - 100) x (40 - 30) = 20 x 10 = $ 200