Question

disos increases from $8 to $10 if your income is $12,000 b Calculate your income elasticity of demand as your income increnses from the price is S16 (2) (30 points) Suppose that the demand supply for rice is as follows: The equilibrium price is pE and the equilibrium quantity is QF in free market. (1) What area can represent the consumer surplus and producer surplus? (2) If govemment want to control the r rice price level at Po, what area can represent the consumer surplus and producer surplus in this case? (3) What kind of policies can fulfill this target? Give some specific example. What is the government's surplus in this case. Draw another graph and color this area. 3 Graph (20 points) . Use Demand and supply diagram and draw graphs to explain why the burden of a tax falls more heavily on the side of the market that is less elastic.

Answer 1

1) the consumer surplus on the above diagram when the equilibrium is at C is the portion A+B and producer surplus is the portion D. as we all know consumer surplus is the area under the demand curve and the producer surplus is the area above the supply curve so the graph illustrates the consumer surplus as A+B and producer surplus as D.

2) if government wants to control the price level at pg then the consumer surplus will be the area B and producer surplus will be the area D. the consumer surplus has declined here because of the rise in price level.

3) to fulfill the target government here can impose tax amounting pe-pg which will increase price level to pg from pe. and this can be achieved by contractionary fiscal policy where government imposes tax to reduce money supply. here this can help in rise the price level here. and the government surplus here is the portion A.

4) as we know the tax burden is devided between the consumer and producer according to its elasticity. the tax is more on consumer when the demand is less elastic and vice versa. lets discuss with help of diagram.
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