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 50 45 40 35 L 30 O 25 - 20 Demand Equilibrium 30-- Consumer Surplus Producer Surplus 15 Supply I 10

Answer 1

Before tax
Consumer surplus
=Lime color area
=0.5*(40-30)*320
=1600
Producer surplus
=purple are
=0.5*30*320
=4800

After tax
Consumer surplus
=lime color triangle
=0.5*5*   160
=400
Producer surplus
=purplus area
=0.5*15*160
=1200
Tax
=(35-15)*160
=3200
Deadweight loss
=0.5*20*160
=1600
Before tax After tax
CS 1600 400
PS 4800 1200
Tax 0 3200
DWL 0 1600
Total surpls 6400 6400