Question

Suppose market demand for bread is given by the equation QD = 12-P while the market supply equation is Qs = 2P. a. Calculate the equilibrium price and quantity, consumer surplus, and producer surplus in the market for tires. Graph your results. b. Suppose the government imposes a tax on tire producers of $3 per tire. i. What price will the buyer pay? What is the burden to consumers? What amount per unit will the seller receive? What is the burden to producers? ii. Find the new producer surplus, consumer surplus, tax revenue and the deadweight loss due to the imposition of this tax. Show these areas on a new graph.

Answer 1

a) Setting QD=QS

12-P=2P

12=3P

P = 12/3 = 4

Q = 12-4 = 8

CS =area AEB= 0.5*8*(12-4) = 32

PS =area BEC= 0.5*8*(4-0) = 16

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b) When a tax of $3 is introduced, the supply curve will shift upwards by $3 at each price level

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1) Buyers will pay $6

Consumers burden = (6-4)/3*100 = 66.67%

Seller will receive $3

Producers burden = (4-3)/3*100 = 33.33%

2) New CS = area AFG = 0.5*6*(12-6) = 18

New PS = area IHC = 0.5*6*(3-0) = 9

Tax revenue = area GFHI = 6*3 = 18

DWL = area FEH = 0.5*(8-6)*(6-3) = 3