Question

d) All UI WU UUUU 9) Suppose the demand and supply for cheese curds is given by the following equations where P is the price per unit of cheese curds and Q is the number of units of cheese curds: Demand: P = 15 - 30 Supply: P =Q+3 If the government imposes an excise tax of $4, what will be the resulting consumer price and producer price? 10) The figure below represents demand and supply in the market for gasoline. Use the diagram to answer the following questions. Price (dollars per gallon) Supply, S, Tax $3.80 3.40 3.20 Demand 30 35 Quantity (billions of gallons per year) a. How much is the government tax on each gallon of gasoline? b. What is the quantity sold after the imposition of the tax? c. What is the total tax revenue collected by the government? d. What is the value of the excess burden (deadweight loss) of the tax?

Answer 1

9)

A 16 Supply - E - 97 Excise TAX B6 123 Demand Puanlity

Demand = P = 15 - 3Q

Supply = P = Q + 3

At equilibrium, demand equals supply which makes 15 - 3Q = Q + 3

Q = 3

P = 6

If there is excise tax of $4, more tax will be borne by consumers while less would be borne by producers. You can calculate this by observing the gap between demand touching Y-intercept and equilibrium price which is 9 and gap between supply curve touching Y-intercept and equilibrium price which is 3. Divide the tax in the same ratio. As the gap is thrice in demand touching Y-intercept and equilibrium price and supply curve touching Y-intercept and equilibrium price, tax would be decided in the same ratio among these parties.

Initial consumer surplus is area of triangle ABC whose sum is (1/2) * (3 - 0) * (15 - 6) = 13.5

Initial producer surplus is area of triangle BCH whose sum is (1/2) * (3 - 0) * (6 - 3) =  4.5

Consumer surplus post excise tax is area of triangle ADE whose sum is (1/2) * (2 - 0) * (15 - 9) = 6

Producer surplus post excise tax is area of triangle FGH whose sum is (1/2) * (2 - 0) * (5 - 3) = 2

10)

eril A3 3.80 6 3.20 ---- Denord Quantity 30 32

• Government tax = 3.8 - 3.2 = 0.6 (price paid by consumers - price received by producers)
• After tax, 30 units are sold.
• Total tax revenue is area of rectangle ABCD whose sum = (3.8 - 3.2) * (30 - 0) = 1.8
• Deadweight loss is area of triangle CDE whose sum = (1/2) * (35 - 30) * (3.8 - 3.2) = 1.5