Question

Suppose that the economy has 10 workers. The supply curve of workers is given by: P=0.1Q+100. Also, there are two types of consumers: A and B. Each A has the following demand curve: Q=1000-5P. The demand curve of B given by: Q=100-0.5P. Assume that there are 10 A and 100 B in this market.

a. Calculate the aggregate demand and aggregate supply curves.

b. Calculate the equilibrium price and quantity.

c. Calculate the consumer's surplus, the producer's surplus and total surplus.

d. Suppose that the government decides to subsidize product. How much subsidy is needed for lowering the market price to 100 (for consumers). Calculate the consumer, producer and society surplus.

e. (ignore d) Suppose that the government impose tax of 20 RMB per product. Calculate the new price and quantity at equilibrium. Calculate the deadweight loss of the economy.

Answer 1

Part (A)

There are 10 workers in the economy with supply function

there are two types of consumers: A and B

Part (B)

Part (C)

PArt (D)

subsidy is implemented by government which reduces price paid by consumers to

government should implement a subsidy of $ 100

Part (E)

price paid by consumers is $ 160 and price paid by producers is $ 140

Before tax price is $ 150

Therefore, tax burden is shared equally between consumers and producers

after tax quantity is 4000 units