Question

Demand for coffee is P = 10 - 0.20Q and Supply of coffee is P = 0.05Q + 0.50

            A) Calculate market equilibrium price and quantity

            B) Calculate consumer and producer surplus if this market is in equilibrium.

            C) Illustrate the coffee market with a graph. Be sure to label supply, demand, equilibrium price and      quantity, consumer surplus, and producer surplus.

            D) Briefly explain in what ways market equilibrium is considered efficient.

            E) Calculate the effects a $2.00 per unit tax would have on price and quantity in the coffee market.

            F) Around equilibrium who is more responsive to price changes, consumer or producers?

            G) Briefly explain in what ways the new level of output is considered inefficient.

Answer 1

A)

P	QD	Qs
0	50	-10
2	40	30
2.1	39.5	32
2.2	39	34
2.3	38.5	36
2.4	38	38
2.5	37.5	40

Eq price = $2.4
Quantity = 38

B)

CS = ½*b*h
= 0.5*38*(10-2.4) =144.4
PS = ½*b*h = 0.5*38*(2.4-0.5)=36.1

C)

D) The market equilibrium is considered efficient if the market is influenced only by demand and supply and with no government intervention, there would be easy entry and exit of firms, consumers have complete information of the good

E) With the $2 tax, the price increases and the new equilibrium price would be $4 and quantity is 30

F) Consumer is more responsive as he would be bear $1.6 of tax and producers would bear $0.4 of total $2

G)

With the imposition of tax, there would be deadweight loss, which would the reduce the efficieny by $8 = 0.5*2*8