Question

3. Suppose you have a competitive market whose supply function was given by Qs = 4000, and market demand function was given by Qd = 10,000 – 500P. (a) Compute the consumer and producer surplus that results from the competitive market equilibrium. (2 points) (b) Suppose that in this market the government put in place a price control at $15. Compute the resulting consumer surplus and producer surplus that would result from this price. (2 points) (c) What if instead of the price control, the government put in place a tax of $3 per unit in this market and the government placed the tax on suppliers. Explain, numerically and intuitively, the impact of the tax in terms of the tax incidence, and in terms of what the tax means for the total surplus that results and efficiency in this market. (4 points) (d) Consider part (c), how would your analysis on all points be different if the $3 tax was instead placed on consumers of the product? Explain again both numerically and intuitively. (2 points) (e) Consider this same market and provide an intuitive explanation why a binding price floor creates an efficiency loss in this market, but a binding price ceiling does not. (2 points)

Answer 1