Question

The market for airplane tickets 0 25 50 75 100 125 10. Compute Consumer Surplus with a tax 11. Compute Producer Surplus 12. What is total surplus? 13. If there is a $100 tax per ticket (paid by the airlines). Show what happens to the graph above. 14. Compute Consumer Surplus with the tax 15. Compute Producer Surplus with the tax 16. Compute total tax revenue collected from the tax. 17. What is lost to the economy from the tax? 18. Producers are the ones who collect the tax and pay the government. Do they pay the full cost of the tax? Explain

Answer 1

10) CS without the tax = 0.5*100*(400-200) = 10000

11) PS = 0.5*100*(200-0) = 10000

12) TS = CS+PS = 20000

The market for P 400 airplane tickets $ 350 300 250 200 150 D 100 50 0 25 50 75 100 125

13) With a tax, the supply shifts to the left by 100 so the equilibrium quantity decreases to 100

14) CS = 0.5*75*(400-250) = 5625

15) PS = 0.5*75*(150-0) = 5625

16) Tax revenue = 100*75 = 7500

17) DWL = 0.5*(100-75)*100 = 1250

18) No, they do not as the burden is distributed to both the consumers and producers as per their elasticity.