Question

Consider the market for mountain bikes. The following graph shows the demand and supply for mountain bikes before the government imposes any taxes. First, use the black point (plus symbol) to indicate the equilbrium price and quantity of mountain bikes in the absence of a tex. Then use the green point (triangle symbol) to shade the area representing total consumer surplus (CS) at the equilbrium price. Next, use the purple point (dlamond symbol) to shade the area representing total producer surplus (PS) at the equilibrium price, Before Tax 150 135 Demand 120 105 Consumer Surplus 75 60 45 30 15 Producer Surplus Supply 0 70 140 210 200 350 420 400 00 630 700 QUANTITY (Bikes)

Answer 1

Before Tax Consumer Supplies area ABC = 1/2 times BC times AB = 1/2 times 280 times (120 - 90) = 140 times 30 = $ 4, 200 Producer supplies area OBC = 1/2 times BC times OB = 1/2 times 280 times 90 = 140 times 90 = $12, 600 Tax Revenue 0 Dead weight Loss 0 After Tax area ABC = 1/2 times BC times AB = 1/2 times 140 times (120 - 105) = 70 times 15 = $1, 050 area ODE = 1/2 times DE times OD = 1/2 times 140 times 45 = 70 times 45 = $3, 150 area BCED = BC times DB = 140 times (105 - 45) = 140 times 60 = $ 8, 400 area CEF = 1/2 times CE times GF = 1/2 times (105 - 45) times (280 - 140) = 1/2 times 60 times 140 = 30 times 140 = $ 4, 200