Question

The market for ice cream is a perfectly competitive market and has the following inverse demand curve and inverse supply curve, where p is $ per gallon and Q is billions of gallons of ice cream per year: Demand: p = 16 – 5Q; Supply: p = 4 + 2.5Q

a.         Provide a graph of the market for ice cream. Calculate and show the equilibrium price and quantity (in billions of gallons) in the market.

b.         Calculate the consumer surplus and producer surplus in the market (all of your answers should be in billions of dollars and rounded to the nearest hundredths for b, c and d).

c.         The government believes people are eating too much ice cream so they place a tax of $0.60 per gallon paid by sellers of ice cream to the government. Calculate the new equilibrium price and quantity sold in this market and show the effects on the graph in part a.

d.         As a result of the tax, calculate and explain the change in consumer surplus, the change in producer surplus, the tax revenue and the deadweight loss from the tax.

Answer 1