Question

The market demand function for wheat is Q^d = 10 - 2P and the market supply function is Q^s = 4P - 2, both measured in billions of bushels per year.

i) Suppose the government wants to increase the price of wheat to $3/bushel and they impose a voluntary production reduction program to achieve their goal.

a) What is the size of the deadweight loss from the program?

b) What is the size of the producer surplus?

c) What is the size of the aggregate surplus?

ii) Suppose the government imposes a $0.50 tax on each bushel of wheat. (Separate from part i)

a) The price received by sellers with the tax is:

b) The consumer surplus with the tax is:

c) The aggregate surplus with the tax is:

d) The producer surplus after the tax is:

e) The loss in consumer surplus due to the tax is:

Answer 1

Answer:(i)