Question

For the next few questions, consider the market for a type of equipment used by crafting enthusiasts to cut out die-cut shapes. It's a specialized market, so we'll just have to assume we have enough buyers and sellers to have our demand and supply curves be straight, smooth lines. The following information applies to the market before any tax is applied:

Vertical intercept, demand curve: 80
Vertical intercept, supply curve: 50
P* = $60
Q* = 40

Later, a tax is put on the market. You'll have to calculate the per-unit tax. But you do know that it makes the price paid by buyers rise to $70 and the price received by sellers to fall to $55. With the tax, only 20 units are sold. (These numbers are not very realistic - but just go with it.)

A.) Carefully following all numeric instructions, calculate the per-unit tax.

B.) Calculate market total surplus AFTER the tax is applied. Be careful about what's included and what is not.  

C.) Calculate producer surplus AFTER the tax is applied.

D.) Calculate consumer surplus BEFORE the tax is applied.

E.) Calculate DWL after the tax is applied.

Answer 1

Ans)

A) Per unit tax= Price paid by buyers after tax - price received by sellers after tax = $70 - $55 = $15

B) Total surplus = Consumer surplus + producer surplus

Consumer surplus = 1/2× base × height = 1/2×20×(80-70) =$100

Producer surplus = 1/2× base × height = 1/2× 20×(55-50) = $50

Total surplus = $100 + $50 = $150

C) Producer surplus after tax is $50. See above part.

D) Consumer surplus before tax = 1/2× height× base = 1/2 × 40×(80-60) = $400

E) DWL = 1/2 × base × height = 1/2 ×(40-20)×(70-55) = $150