Chapters%208%20and%2010%20Practice%20B%20-%20Answers

Chapters%208%20and%2010%20Practice%20B%20-%20Answers -...

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Chapters 8 and 10 Practice B - Answers 1. Demand in a perfectly competitive market is P=100-Q. Supply in that market is P=10+Q. What is the market equilibrium price and quantity? Given that price and quantity, what is the consumer surplus, producer surplus, and deadweight loss? If the government imposes a $10 per unit sales tax, what is the new equilibrium price and quantity? Now how much is consumer surplus, producer surplus, and deadweight loss? Prior to the tax, the market equilibrium price is $55. The market equilibrium quantity is 45 units. Consumer surplus is 1012.5, and producer surplus is 1012.5. There is no deadweight loss because the tax has not been imposed yet. After the tax, the new equilibrium price is $50. The new equilibrium quantity is 40 units. Consumer surplus is 800, and producer surplus is 800. Deadweight loss is now 25. 2. Suppose the following supply and demand curves govern the market for apples: supply: P = 3Q + 4 demand: P = 12 – Q a. Graph and calculate the equilibrium price and quantity. P = P 3Q + 4 = 12 – Q Q* = 2 P* = $10 b. Show that the effect of a per-unit tax of $1 levied on suppliers is the same as when levied on buyers. If the tax is on suppliers, then the supply curve with the tax is: P = 3Q + 5. Solve for P and Q as in Part (a) to find that Q* = 7/4 and P* = $10.25. Thus, buyers pay $10.25 and suppliers receive $10.25 - $1 = $9.25 per unit. If the tax is on buyers, then the demand curve with the tax is: P = 11 – Q. Solve to find that Q* = 7/4 and P* = $9.25. Thus, suppliers receive $9.25 and buyers pay $9.25 + $1 = $10.25 per unit. 1
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c. What percent of the $1 per-unit tax is borne by sellers? What percent is borne by buyers? Sellers receive $9.25 after the tax compared to $10 before the tax, so they are paying $0.75 of the $1 tax, or 75%. Buyers pay the other 25% of the tax because they pay $10.25 after the tax compared to $10 before the tax. Sellers bear a greater burden than buyers in this case because the supply curve is relatively inelastic compared to the demand curve. With a more elastic demand curve, the post-tax price increase to buyers is smaller. d. Define deadweight loss.
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Chapters%208%20and%2010%20Practice%20B%20-%20Answers -...

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