Question

TMZ Flooring is a commodity like any other and at the wholesale level, there are many domestic and foreign producers that compete vigorously. Suppose you have the following estimated market demand and supply functions for wood flooring.

Qd = 248.08 + 2.2Y − 0.6PH + 1.2 PT − 4P

Qs = − 10 + 2P

In these equations, Q measures output in square yards of flooring (in 1,000’s) P is the price per square yard of wood flooring, Y is annual average household income (in 1,000’s), PH is an index of housing prices, and PT is the average price per square yard of tile flooring.

After gathering the latest data, you find that average household income is $36,400, the current level of the housing price index is 110.6, and the average price per square yard of tile flooring is $48.50.

a. Find the current equilibrium price and quantity in this market.

b. Find the equilibrium price and quantity in this market if the government imposes a $9 per square yard tax on wood flooring.

c. What will happen to the price buyers pay per square yard as a result of the tax?

d. What price will sellers actually receive (net price) per square yard after the tax?

e. How much revenue will this tax raise for the government?

f. How much of the tax burden is borne by buyers? How much is borne by sellers?

g. What is the deadweight loss for society from this tax?

Answer 1