Question

There is a coastal community north of San Francisco that has 2,000 houses (there cannot be less than 2,000 houses). At a price of $200,000 area residence would purchase 4,000 homes but if the houses were $800,000 all of the residence would move out of the community. Currently the market price of a house in this area is $500,000 and all 2,000 homes are purchased. However, if the market price increased to $700.000, builders would add 50 homes to the community (A) What is the linear supply function? (B) What is the linear demand function? (C) Assume a 1.5% tax is collected upon property purchase. Graph supply, demand and the tax. Label all intercepts and market equilibrium price and quantity. (include in upload file only) (D) How much revenue is collected from the tax? Does the tax burden fall on home sellers or buyers? Is there a DWL?

Answer 1

(A). Here, Linear Supply function (SS) is represented by Orange line, which is obtained by joining Pt. E and pt. 2.

(B). And, Linear Demand function (DD) is represented by Black line, which is obtained by joining Pt. E and pt. 1.

Price SS 800,000 N 700,000 Consumen Surplus 500,000 Producer Surplus E 1 200,000 DD 0 2000 2050 4000 Qty. DD and SS

So, Consumer Surplus = 1/2 x Base x Height = 1/2 x 300,000 x 2000 = $ 300,000,000

and, Producer Surplus = 1/2 x Base x Height = 1/2 x 300,000 x 2000 = $ 300,000,000.

(C). Imposition of 1.5% tax will shift Supply to the left from SS to SS'. So, new equilibrium will be E' (higher than E). And, price will be higher than previous price and qty. will be lower than previous qty. because tax will make production of house costly, therefore, leading to increase in price and thereby, decrease qty. supply and hence, supply curve will shift to the left.

Price SS' SS 800,000 C.S. E' T 5,07,500 Tax 1 500,000 P.S. DWL E DD 1970 2000 Qty. DD and SS

(D). Therefore, this imposition of tax burden will be beared by both consumer (buyer) and producer (supplier) and also there will be DWL created and burden will generate tax revenue to govt.