ANSWER A Suppose market demand for tires in millions is given by the equation QD = 12 – P. Tires are supplied according to the market equation QS = 2P. a. Calculate the equilibrium price and quantity, consumer surplus, and producer surplus in the market for tires. Graph your results. b. Given the contribution of tire producers to environmental pollution, what if the government imposes an excise tax on tire producers of 3 per tire. How does this affect the supply and demand curves (derive the new supply function and draw the graph)? c. How much is the price paid by the consumers? Received by the sellers? d. Compute the new equilibrium price and quantity given the excise tax described in part (b). On a graph show the changes in equilibrium price and quantity due to the imposition of tax. e. Show on a graph the new producer surplus and consumer surplus given the imposition of the excise tax described in part (b). Also show tax revenue and the deadweight loss due to the imposition of this tax. f. Calculate the effect of the excise tax describe in part (b) on the consumer and producer surplus. g. What, if any, is the deadweight loss caused by the tax? h. What is the government revenue when this excise tax is implemented? i. Who bears the greater economic incidence of the tax, the consumer or the producer?
ANSWER A
Suppose market demand for tires in millions is given by the equation QD = 12 – P. Tires are supplied according to the market equation QS = 2P.
a. Calculate the
b. Given the contribution of tire producers to environmental pollution, what if the government imposes an excise tax on tire producers of 3 per tire. How does this affect the
c. How much is the price paid by the consumers? Received by the sellers?
d. Compute the new equilibrium price and quantity given the excise tax described in part (b). On a graph show the changes in equilibrium price and quantity due to the imposition of tax.
e. Show on a graph the new producer surplus and consumer surplus given the imposition of the excise tax described in part (b). Also show tax revenue and the
f. Calculate the effect of the excise tax describe in part (b) on the
g. What, if any, is the deadweight loss caused by the tax?
h. What is the government revenue when this excise tax is implemented?
i. Who bears the greater economic incidence of the tax, the consumer or the producer?
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