Homework Answers
a. Competitive equilibrium without government intervention is where Demand equals supply.
Equilibrium Quantity= 4 million gallons
Equilibrium Price= $4 per gallon
b. Consumer surplus without government intervention= 0.5*(6-4)*4= $4 million
C. Producer surplus without government intervention=0.5(4)(4)= $8 million
D. Excise tax= Price paid by Consumers- Price received by producer= $5-$2=$3 per gallon.
E. After tax, equilibrium occurs where supply w tax meets demand curve.
Equilibrium Price with tax= $5 per gallon
Equilibrium Quantity= 2 million gallons
F. Consumer surplus with tax=0.5(6-5)(2)= $1 million
G. Producer surplus with tax=0.5(2)(2)=$2 million
H. Dead weight loss= 0.5(5-2)(4-2)=0.5*3*2= $3 million
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