Question

1. Suppose that the market for coffee can be described by the following demand and supply curves (prices are per kg): Qd = 260 ? 5P QS = 8P

a) Find the market equilibrium in the absence of taxes. Draw the demand and supply curves, labelling all intercepts and the market equilibrium

b) Calculate the values of consumer surplus (CS) and the producer surplus (PS) indicating each of these on the diagram in a).

c) Suppose now that the government decides to tax the supply of coffee by $13 per kg. Calculate the equilibrium with the tax. How much tax revenue is collected? How much of the tax is paid by producers? By consumers? What is the amount of the deadweight loss? Indicate these amounts graphically.

d) Suppose instead the tax is imposed on consumers. How would your answer to c) change? What do you notice?

e) Discuss the effects of, pre and post, imposition of tax. What can be used as a gauge as to who will be paying more of the tax and why?

Answer 1

after the tax is imposed,

Qd=260-5P & Qs=8*(P-T)

=8P-8*13=8P-104

new market equilibrium Qd=Qs

260-5P=8P-104

13P=364

P=28

thus the price paid by customer after the tax is imposed is 28 (20+part of the tax amount, 8)

price received by the producer 20-(13-8)}}part of the tax amount

=20-5

=15