Question

PLEASE ANSWER QUESTIONS E - H

Q3 The demand for ice cream is given by QD = 20 - 2p, measured in gallons of ice cream. The supply of ice cream is given by QS = 4p – 10. a. Graph the supply and demand curves, and find the equilibrium price and quantity of ice cream. b. Suppose that the government legislates a $1 tax on a gallon of ice cream, to be collected from the buyer. Plot the new demand curve on your graph. Does demand increase or decrease as a result of the tax? c. As a result of the tax, what happens to the price paid by buyers? What happens to the price received by sellers? How many gallons of ice cream are sold?

Answer 1

Pre-tax equilibrium has

20 - 2p = 4p - 10

30 = 6p

p = 5 and q = 10

Post-tax equilibrium

20 - 2p = 4(p - 1) - 10

34 = 6p

p = 5.67 (buyers)

p = 4.67 (sellers)

q = 8.67 units

E) CS before tax = 0.5*(maximum price - price paid)*qty bought = 0.5*(10 - 5)*10 = 25

CS after tax = 0.5*(10 - 5.67)*8.67 = 18.77

F) PS before tax = 0.5*(price received - minimum price)*qty = 0.5*(5 - 2.5)*10 = 12.5

PS after tax = 0.5*(4.67 - 2.5)*8.67 = 9.40

G) Tax revenue = tax*qty = 1*8.67 = $8.67

H) DWL = 0.5*(tax)*(qty reduced)

= 0.5*1*(10-8.67)

= 0.67.