Question

2. Taxes and welfare 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. Before Tax Demand Equilibrium Consumer Surplus PRICE (Dollars per purse) Producer Surplus Supply L 0 70 140 210 280 350 420 490 QUANTITY (Purses) 580 630 700 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 $60 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.

Answer 1

Before tax

Equilibrium price P = 90

Equilibrium quantity Q = 280  

Before tax po 90 - - - - - 280 cs = < (120 - 902 (2802 = 1x30x280 ų 200 ps = [90-02 (280) 2 = ₂ x 90 x 280 = 12600

After tax 120 Po 105 P* gott 1 Reveni Рѕ ч5 - - 140 280 tax Equelibrium quantity after 8 = 48 Price pued by buyer Pb = price received by sever 105 Ps= 45 Burden of tax on buyer = 105-go 15 = Burden Of tax on seller = 90 - 45 = 45 Sinee demand is more elartic than supply the refore the burden of the tax falls more havily on the less elastic side of the market. Thus the burden of tax falls more on seller

C5 = 16120 - 1052 140) = 1050 PS - 45 -6) (14०) = 3150 DOL = = 105-45)(286 - 140) = x 607140- 4200 Tax Revenu = (105-45) (1५०) = 60X1408400