In: Economics
Suppose that a market is described by the following supply and demand equations:
QS = 2P
QD = 400 - 2P
Suppose that a tax of $40 is placed on buyers, so the new demand equation is:
QD = 400 – 2(P + 40)
a) Solve for the new equilibrium. What happens to the price received by sellers, the price paid by buyers, and the quantity sold? Calculate the new consumer surplus, producer surplus and total surplus.
b) Calculate the Tax revenue and the deadweight loss generated by the tax.
a) Qd=Qs
400-2(P+40) = 2P
400-2P+80=2P
480=4P
P=120
Price of $120, includes $40 as tax and hence the net price =
$80
Qd = 400-2(80+40) = 400-2*120=160
Price received by sellers = $80
Price paid by buyers = $120
Quantity sold = 160
New consumer surplus = area of triangle = 0.5*160*(160-80) = $6400
New Producer surplus = 0.5*160*(80) = $6400
b) Tax revenue = Q*tax = 160*40 = $6400
DWL = area of triangle = 0.5*(200-160)*(120-80) =$800