Question

Figure 1: Market for Chocolates Price: $80 Supply $70 860 $50 $40 $30 $20 P $10 Demand 10 20 30 40 50 60 Kgs of Chocolates Figure 2: Market for Steel Price. Social Cost $175 $150 Supply $125 $100 $75 $50 $25 Demand Steel (1000) 10 15 20 25

Answer 1

1 (a) In market equilibrium in chocolate market

Quantity of chocolate = 30 kg

Price of chocolate = $40

(b) Consumer surplus is area enclosed above the Price = $40 line and the demand curve , which is triangular in shape .

Consumer Surplus = area of triangle enclosed by Price= $40 line and demand curve = (1/2) *30*(70-30) = $600

Similarly,

Producer surplus is area enclosed by Price = $40 line and the supply curve , which is triangular in shape .

Producer Surplus = area of triangle enclosed below the Price= $40 line and demand curve = (1/2) *30*(40-10) = $450

c) When Q_{​​​​​​1} = 20 , P_{​​​​​​1} = $50 and when Q_{​​​​​​2}​ = 40, P_{​​​​​​2} = $30

Elasticity of demand ( midpoint) = [(Q_{​​​​​​2}​​​ - Q_{​​​​​1}​)/{(Q_​2 + Q₁ )/2} ] ÷[ (P_{​​​​​​2} - P_{​​​​​​1})/{(P_{​​​​​​2} P_{​​​​​​1})/2} ] = [ (40-20)/{(40+20)/2} ] ÷ [(30-50)/{(30+50)/2}] = [20/{60/2}] ÷ [(-20)/{80/2} ] = (2/3 )÷ (-1/2) = -4/3 = -1.333 is the elasticity of demand.

d) At the price ceiling P_{​​​​​​c} = $20 , quantity demand increases to 50kgs whereas supply decreases to 10kgs . A gap of 50-10 = 40kg arises between supply and demand of chocolates.

Consumer surplus increases. The triangular area enclosed above the price line P_{​​​​​​c} = $20 and demand curve is consumer surplus. Its area = (1/2)*50*(70-20) =1250 . Consume surplus = $1250 which greater than it was in equilibrium condition.

Producer surplus decreases. The triangular area enclosed below the price line P_{​​​​​​c} = $20 and supply curve is producer surplus. Its area = (1/2)*10*(20-10) =50 . Producer surplus = $50 which is lesser than it was in equilibrium condition.

e) The new market equilibrium aftet tax imposition is at P= $50 and Q = 20kgs

Tax is the difference between supply curve and S_{​​​​​​2} line which is $20. Seller is receiving $50 - $20 = $30 whereas buyer is paying $50

Consumer demand decreases after tax imposition from 30 kgs to 20 kgs i.e., buyers decreases the amount they were buying. Seller earns lesser than the market price at which it selling.

Consumer surplus and producer surplus both decreases. Some portion of consumer and producer is captured by tax revenue which is $20*20 = $ 400 and rest by dead weight loss = 20* (30-20) = $200 ( which is a cost to the society due to inefficient allocation)

The formula used here for dead weight loss = tax * ( quantity sold in equilibrium without tax - quantity sold in equilibrium after tax ) .