Question

Suppose supply and demand for air-conditioners in the little Hawaiian town of Paia (Maui) are given by the following equations:

Q_s=P-300

Q_D=2100-3P

where the price is expressed US$, and quantity represents air conditioning units.

a) Please find the equilibrium price and quantity and draw the supply and demand graph. Do not worry about the scale, just represent the relevant information.

b) Please compute the consumer surplus, producer surplus and total surplus and identify them in your graph.

c) Searching for new sources of revenue, the town council places a $40 per unit tax on sellers of air- conditioners. Please draw a new graph showing how the tax changes the equilibrium quantity and prices facing buyers and sellers. Calculate the new equilibrium quantity and prices and label them on your graph.

d) Please compute the consumer surplus, producer surplus and total surplus with the tax and identify them in your graph. Compare these answers to those in part b.

e) What percentage of the tax is paid by producers, and what percentage is paid by consumers? Please explain how this relates to elasticity.

Answer 1

ANSWER supply. demand Os: Qd P-300 2100-3 P. (a) At equilibrium P 200 - 2400-3p 48- 2400 P= 2400 $600 Price $600 0- a ♡ = P-300 600-300 300 units at equilibrium price: $600, Quantity = 300 units equilibrium Consumer producer surplus surples Price deprauel 0 300 600 900 1200 1500 1800 200 Quantity

pace & (6) • Consumer surplay - and below the It is the Area above the equilibrium demand curve. the equilibrium Price Producer supplass. It is the Aree below and above the supply curve. producer consumer surplus and Geoples in the sum of Total Susplus Consumer susplusa by (700- 600) 40 (300-0) by loox 300 50 $ 15000 - . producer Surplus x 1600-300) x (300-0) = x 300x300 $.45000 consumer supplies + 15000 € 45000 producer susplus Total surplus = $ 60,000 ( demand od 2000-2p. TOX= $40 New supply equation Osz (P-40)- 300 Que P-340 equilibrium at

3) 21 оо - - - 34% = 240 со р: 2ча • 3 6fo Ф. Р-9% 2 1 - 34 - 220 чnis equilibrium parce - $610, Quantity a at supply + tax sh bly со C now equilibrium so Bice. 500 t -- --- - - - - - - - - Тр Demond + + Зоовоо доо 20 о 1500 foo уоо фuq tu's

New Consumer rusplass sx (400 - 610x (2700) 45 xto x 270 & $12150 New producer surplus - 3x (70-340) x (2700) x 230 x 200 & $31050 due to tax both consumer susples and producer Slooplus declines (e pertentage of tax paid by consumer is a 10 x los = 100 25 ng a 25 percent percentage of tax pard by producer in = 30 x 100 - 2007 when demand more amount of thx. is more of tax elastic than supply and consumer bear - 75 percent produces bear the the less the amount