16.80 QUESTION 6 QD-97-3P and Qs- 304+ 85P before a tax of $2 is added to each u

Question

16.80 QUESTION 6 QD-97-3P and Qs- 304+ 85P before a tax of $2 is added to each unit of the good. What is the consumer surplus after taxes? (Hint: Becouse suppliers make their decision based on how much they receive ofter tax, the new supply function is: Qs- 304 + 85(P-2)) ROUND TO THE NEAREST CENT QUESTION7 QD- = 135-2P and QS·-492+ 62P before a tax of $1 is added to each unit of the good, what is the dead weight loss after taxes? how much they receive after tox,the new supply unction is Qs 492 + 62(P-1)) (Hint: Becouse suppliers make their decision based on ROUND TO THE NEAREST CENT Save Click Save and Submit to save and submit. Click Save All Answers to save all answers

Explanation / Answer

(Question 6)

New supply function after tax: QS = - 304 + 85P - 170 = 85P - 474

Equating with QD,

97 - 3P = 85P - 474

88P = 571

P = $6.49 (Price paid by buyers)

Q = 97 - (3 x 6.49) = 97 - 19.47 = 77.53

From demand function, when QD = 0, P = 97 / 3 = $32.33 (Reservation price)

Consumer surplus = Area between demand curve and price paid by buyers

= (1/2) x $(32.33 - 6.49) x 77.53 = (1/2) x $25.84 x 77.53 = $1001.69

(Question 7)

In pre-tax equilibrium, QD = QS

135 - 2P = - 492 + 62P

64P = 627

P = $9.80

Q = 135 - (2 x 9.80) = 135 - 19.6 = 115.4

After the tax, new supply function becomes QS = - 492 + 62(P - 1) = - 492 + 62P - 62 = 62P - 554

Equating QD and new QS,

135 - 2P = 62P - 554

64P = 689

P = $10.77 (Price paid by buyers)

Q = 135 - (2 x 10.77) = 135 - 21.54 = 113.46

Deadweight loss = (1/2) x Tax per unit x Difference in Quantity = (1/2) x $2 x (115.4 - 113.46)

= $1 x 1.94 = $1.94

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