Question

Can someone please explain

C. Role of Government 1. Draw a supply and demand graph with a binding price ceiling. Label consumer and producer surplus as well as deadweight loss 2. Who benefits from the imposition of the price ceiling 3. T/F/Explain The current price for your favorite candy is $3. Government imposes a sales tax on this product of $0.50. The new equilibrium price will be $3.50 4. In the graph below, what is the customer's burden of the $0.50 tax on candy? What is the firm's burden? producers? consumers or Price

Answer 1

(1)

In following graph, D0 and S0 are demand and supply curves intersecting at equilibrium point E with equilibrium price P0 and quantity Q0.

Consumer surplus (CS) = Area between demand curve and market price = Area AEP0

Producer surplus (PS) = Area between supply curve and market price = Area BEP0

When a binding price ceiling Pc is imposed lower than P0, quantity demanded rises to Qd and quantity supplied falls to Qs. Since consumers can buy only what producers can sell, market quantity falls at Qs.

New CS = Area ACFPc

New PS = Area BFPc

Deadweight loss = Area CEF

So A Po Pc F Do d

(2)

As result of price ceiling, consumers gain from higher consumer surplus, and producers lose from lower producer surplus.

NOTE: For Q3 and Q4, relevant graph is not provided.