Question

Question 1: In a perfectly competitive market, the demand curve is given as: Q=100-5P, the supply curve is given as Q=3P-12.

1. Compute the total social surplus of this market.

2. If the government impose a tax on the producers, and the tax rate is $2 per unit

   produced. What is the deadweight loss?

3. If the government impose a tax on the consumers, and the tax rate is $2 per unit

   purchased, graphically show the change in the market equilibrium and the deadweight

   loss.

4. If the government provide a subsidy of $4 per unit to the producers, what is the

   deadweight loss?

Question 2: In a small country, the demand curve is given as: Q=100-5P, supply curve: Q=3P-12, and the world price is $10.

1. What is the social surplus under free trade?

2. If the government impose a $2/unit tariff on the good, what is the deadweight loss?

3. Show the change in equilibrium and deadweight loss on a graph.

Question 3: Large country trade:
Country A: demand: Q=400-P, supply: Q=P-20 Country B: demand: Q=300-P, supply: Q=2P-30

1. Which country is importing? What is the global price under free trade?

2. Compute the social surplus of each country.

3. If the importing country impose a $20 tariff, what is the change in social surplus in

   each country?

Answer 1

Answer 1.

Total surplus= 0.5*(20-4)*14= $42

Deadweight loss under tax= 0.5*(2)*(30-26.25)= $3.75

Deadweight loss under subsidy=0.5(4)(37.5-30)= $15

Equilibrium shifts from E1 to E2.

Note-According to the HOMEWORKLIB RULES first question is answered.