Homework Answers
a) setting QD=QS
2600-20P=400
2600-400=20P
P=2200/20 = 110
Q=2600-20(110) = 400
With a tax of $4,the supply remains fixed to 400 so the deadweight loss will be 0
b) Setting QD=QS
2600-20P=12P
2600=32P
P=2600/32= 81.25
Q=2600-20(81.25) = 975
With a tax of $4, the change in quantity and price will be:
2600-20P=12(P-4)
2600+48=32P
P=2648/32 = 82.75
Q=2600-20(82.75) = 945
Deadweight loss = 0.5*(30*4) = 60
c) Deadweight loss occurs when there is a change in the equilibrium quantity because of the tax imposed.
because there is no change in the quantity in the first case as the supply is perfectly inelastic so there is no deadweight loss whereas the quantity changes in the second case so there is a deadweight loss.
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