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Suppose the market demand function is given by D ( P D ) = 60 P D and S ( P S ) = 2 P S . (a) (Find the market equilibrium without taxes (that is,...
Suppose the market demand function is given by D(PD) = 60 − PD and S(PS) = 2PS.
(a) (Find the market equilibrium without taxes (that is, when PD = PS).
(b) Suppose now the supplier is required to play a per unit tax of t = 3. Draw a graph to show the change in the supply curve. Find the equilibrium quantity and prices, q∗, PS∗, and PD∗. How much of the per unit tax is passed on to the consumer? (Hint: in this case, the vertical axis is the demand price.)
(c) Suppose now the demander is required to play a per unit tax of t = 3. Draw a graph to show the change in the demand curve. Find the equilibrium quantity and prices, q∗, PS∗, and PD∗. (Hint: in this case, the vertical axis is the supply price.) Compare your answers in parts b and c.
(d) Calculate the change in consumer's surplus, change in producer's surplus, tax revenue, and dead weight loss as a result of the policy change. Illustrate them on a graph.
