Additional Exercises for the Applications of Competitive Markets (Ch.10). Solutions are at the
1. Let P=q +10 be the (inverse) supply curve and P=50-q be the (inverse) demand curve in a
perfectly competitive market.
What are the equilibrium price and quantity?
At the equilibrium in part (a), what is consumer surplus? Producer surplus? Deadweight loss?
c) Suppose the government imposes an excise tax T of $10 per unit to raise government
revenues. What will the new equilibrium quantity be? What price will buyers pay? What price will
At the equilibrium in part (c), what is consumer surplus? Producer surplus? The impact on the
government budget (here a positive number, the government tax receipts)? Deadweight loss?
e) Suppose the government has a change of heart and removes the tax. Instead, a subsidy T’ of
$5 per unit is granted to producers. What will the equilibrium quantity be? What price will the
buyer pay? What amount (including the subsidy) will producers receive?
f) At the equilibrium in part (e), what is consumer surplus? Producer surplus? What will be the
total cost to the government? Deadweight loss?
2. In the Village of Punjab, Sheryl owns a well, which is the only source of drinking water. The
supply of water is perfectly inelastic at a quantity of 1,000 gallons of water per day. At a price of
$2.00 per gallon, the quantity demanded per day is 1,000 gallons. The government imposes a
$0.50 per gallon tax.
a. After the tax is imposed, what is the price paid by the villagers? What is the price received by
b. How much revenue does the government collect?
c. What fraction of the tax does Sheryl pay? What fraction is paid by the villagers?
3. The figure above illustrates the market for antifreeze. Suppose the government decides to
implement an $8 excise tax on every gallon of antifreeze sold.
a. In the figure, illustrate the effect the tax has on the market for antifreeze.
b. What is the equilibrium price of a gallon of antifreeze before the tax? What is the price paid by
buyers after the tax?
c. What is the equilibrium quantity of antifreeze before the tax? What is the equilibrium quantity