1. Suppose you are given Qs=2P and Qd=120-P a) What is equilibrium price and qua
ID: 1180126 • Letter: 1
Question
1. Suppose you are given Qs=2P and Qd=120-P
a) What is equilibrium price and quantity? show the results in graph (plot P in the vertical axis, and q is horizontal axis)
b) Suppose per unit tax, T is imposed on buyers. Then what is the equilibrium quantity and equilibrium price? Now, assume T=30, then what will be equilibrium price and quantity. (Hint: use P is the price producer receives, and P+T is price paid by the buyer).
c) If tax is imposed on seller what will be the equilibrium (here P is the price paid by the buyer and (P-T) is the price received by the seller). If T=30, show that the price received by seller is same in b) and c ) and the price paid by the buyer are same in both b and c.
d) What is amount of Deadweight Weight Loss (DWL)?
e) If tax is doubled from $30 per unit to $60 dollar per unit, what will be the DWL? Do you think DWL will be just double now? Show graphically.
Explanation / Answer
Qs=2P and Qd=120-P
2P = 120 - P
P = 40
equilibrium price = 40
equilibrium quantity = 80
Qs = 2P
Qd = 120 - (P+T)
2P = 120 - (P+T)
3P + T = 120
T = 30
equilibrium price = 30
price received by the seller = 30
price paid by the buyer = 30+30 = 60
equilibrium quantity = 60
Qs = 2(P-T)
Qd = 120 - P
2(P-T) = 120 - P
3P - 2T = 120
T = 30
equilibrium price = 60
price received by the seller = 60-30 = 30
price paid by the buyer = 60
equilibrium quantity = 60
Deadweight Weight Loss = initial (consumer+producer surplus) - (consumer+producer surplus) after taxation
[(120-40)*80/2 + 40*80/2] - [(120-60)*60/2 + 30*60/2]
2100
t=60
P = 20
P+t = 80
Q = 40
Deadweight Weight Loss = initial (consumer+producer surplus) - (consumer+producer surplus) after taxation
[(120-40)*80/2 + 40*80/2] - [(120-80)*40/2 + 20*40/2]
3600
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