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Chapter_7 - TAXATION AND GOVERNMENT INTERVENTION Chapter 7...

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TAXATION AND GOVERNMENT INTERVENTION Chapter 7 Chapter 7
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Content Consumer Surplus Producer Surplus Show how equilibrium maximizes consumer and producer surplus. Demonstrate the cost of taxation to consumers and producers.
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Content Explain why the person who physically pays the tax is not necessarily the person who bears the burden of the tax. The difference between taxes and price control
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Consumer Surplus Consumer Surplus is the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it. Consumer Surplus measures the benefit to buyers of participating in a market.
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Consumer Surplus Price S D Quantity 0 $10 9 8 7 6 5 4 3 2 1 10 9 8 7 6 5 4 3 2 1 Consumer Surplus CS = ½(5x5) = 12.5 = Area of blue triangle Consumer Surplus is the area below the demand curve and above the price.
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Producer Surplus Producer Surplus is the amount of a seller is paid for a good minus the seller’s cost . Producer surplus measures the benefit to sellers of participating in a market.
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Producer and Consumer Surplus Price S D Quantity 0 $10 9 8 7 6 5 4 3 2 1 10 9 8 7 6 5 4 3 2 1 Producer Surplus Consumer Surplus CS = ½(5x5) = 12.5 = Area of blue triangle PS = ½(5x5) = 12.5 = Area of red triangle Producer surplus is the area above the supply curve but below the price the producer receives.
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$4 $10 $9 $8 $7 $6 $5 50 100 300 250 200 150 Review Question Given the following demand and supply of pizza, find consumer and producer surplus. Consumer surplus: ½ x ($10-6) x 100 = $200 Producer surplus: ½ x ($6-4) x 100 = $100 S D
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Show how equilibrium maximizes consumer and producer surplus.
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