solutions_to_practice_questions_for_exam_2

solutions_to_practice_questions_for_exam_2 - SOLUTIONS TO...

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SOLUTIONS TO PRACTICE QUESTIONS FOR EXAM 2 (1) (a) Equilibrium Price: P 1 = $60; Equilibrium Quantity: Q 1 = 20; Consumer Surplus = 0.5 × $40 × 20 = $400; Producer Surplus = 0.5 × $60 × 20 = $600; Total Surplus or Welfare = Consumer Surplus + Producer Surplus = $400 + $600 = $1000. (b) Equilibrium Quantity: Q 2 = 15, Price Paid by the Consumer: P D = $70; Price Received by the Producer: P S = $45; Consumer’s Burden of the Tax: P D – P 1 = $10; Producer’s Burden of the Tax: P 1 – P S = $15; Tax Revenue = $25 × 15 = $375; Consumer Surplus = 0.5 × $30 × 15 = $225; Producer Surplus = 0.5 × $45 × 15 = $337.50; Total Surplus or Welfare = Consumer Surplus + Producer Surplus + Tax Revenue = $225 + $337.50 + $375 = $937.50; Deadweight Loss: DWL = $62.50. (2) Before the tariff is imposed the domestic price of hula beans is 60 cents per pound. At that price, 10 pounds of hula beans are domestically produced, but 70 pounds are consumed, so that 60 pounds of hula beans are imported. After the tariff, the domestic price of hula beans is 80 cents
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