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Correction Q4

# Correction Q4 - Correction Q4 p14 The Consumer surplus was...

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Correction Q4, p14 . The Consumer surplus was computed incorrectly as q (1000 ° p ) 1 2 instead of Q (1000 ° p ) 1 2 , where q is the quantity supplied by a single °rm and Q is the total quantity supplied by all °rms together. Note that we are not going to ask you a question like Q4 in the exam. This question was very challenging. The solution to Q4 is correct until the very last paragraph. The last paragraph should be: "In this instance, each producer makes pro°t ° = 7400 , for a total producer surplus of N = 4 ± 7400 = 29 ; 600 . Consumer surplus is still given by 1 2 base times height, where the height is the distance between the y-intercept and the price: h = 1000 ° 280 = 720 . The base is still given by the TOTAL quantity supplied Q = 720 . So CS = 1 2 720 2 = 259 200 . And government surplus is the amount of the tax times the number of °rms onto which the tax is levied GS = 4 ± 15 ; 000 = 60 ; 000 . Total surplus is TS = PS + CS + GS = 29600 + 1 2 720 2 + 60000 = 348 800 This is clearly LARGER than the original surplus of 320,000." Explanation : What happens here? Why does a tax increase welfare? (This

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