Suppose that the demand curve for a barrel of orange juice is given by the equation P=320-.04Q with quantity, Q, measured in thousands of barrels per day and price, P, measured in dollars per barrel. The supply curve is given by PS=5+.015Q.
a. Compute the equilibrium quantity and price.
b. Calculate the consumer and producer surplus.
c. Suppose that a $3 per barrel “orange” excise tax is imposed on local farmers. What is the new equilibrium quantity and price?
d. Calculate the arc price elasticity of demand between the two points. Is the demand for oranges elastic or inelastic? Using this calculation, do the consumers or the producers bear the majority of the tax burden?
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