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E202Solutions5.4

# E202Solutions5.4 - market as a result of the tax Answer The...

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Answer : The equilibrium price is \$5 and the equilibrium quantity is 3,000 units/week. Consumer surplus is the area between the demand curve and the price line: 0.5 (8 - 5) 3,000 = \$4,500/week. Producer surplus is the area between the supply curve and the price line: 0.5 (5 - 2) 3,000 = \$4,500/week. Therefore, the total economic surplus is \$9,000/week. b. Suppose a per-unit tax of \$2, to be collected from sellers, is imposed on this market. Find the new price and quantity. How much government revenue will this tax generate each week? Calculate and graph the direct loss in economic surplus experienced by participants in this
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Unformatted text preview: market as a result of the tax. Answer : The tax shifts the supply curve up by \$2. The new equilibrium price is \$6 and quantity is 2,000/week. Consumer surplus is now 0.5 (8 - 6) (2,000) = \$2,000/week. Net of the tax, sellers receive a price of \$4 per unit. Producer surplus is now 0.5 (4 - 2) (2,000) = \$2,000/week. The tax revenue collected is (\$2/unit)(2,000 units/wk) = \$4,000/week. The efficiency loss is the area between the demand and supply curves between the new and the old quantities: 0.5 (6 - 4) (3,000 - 2,000) = \$1,000/week....
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