Chapter 50, Problem 1FRQ

a)

To determine

Quantity that would be sold in the market

Explanation of Solution

When the government impose an excise tax of $60 on producers then the quantity sold in the market would be 1000

Economics Concept Introduction

Introduction: Quantity is the amount of goods which are sold or supplied in the market.

b)

To determine

Price that consumers will pay in the market

Explanation of Solution

Consumers will pay $90 as a price because the tax is imposed by the government.

Economics Concept Introduction

Introduction: Price of goods influence by adding tax which means price increases by imposing tax on goods.

c)

To determine

Consumer surplus change

Explanation of Solution

  $\begin{array}{l}\text{Consumer surplus before tax = ½(base×height) or ½ }\left(\text{Q}\right)\text{×}\left(\text{price}\right)\hfill \\ =\mathrm{½}(2,000\times 60)\hfill \\ =\$60,000\hfill \\ \text{Consumer surplus after tax = ½(base×height) or ½ }\left(\text{Q}\right)\text{×}\left(\text{change in price}\right)\hfill \\ =\mathrm{½}\left(2,000\right)\times \left(90-60\right)\hfill \\ =\$15,000\hfill \\ \text{Therefore, there is decrease in consumer surplus }=\$60,000-\$15,000\hfill \\ =\$45,000\hfill \end{array}$

Consumer surplus will change due to tax by decreasing with the amount of $45,000

Economics Concept Introduction

Introduction: Consumer benefit that is incurred from market competition or buying goods at a certain price is called consumer surplus.

d)

To determine

Producer surplus change

Explanation of Solution

  $\begin{array}{l}\text{Producer surplus before tax = ½(base×height) or ½ }\left(\text{Q}\right)\text{×}\left(\text{price}\right)\hfill \\ =\mathrm{½}(2,000\times 60)\hfill \\ =\$60,000\hfill \\ \text{Producer surplus after tax = ½(base×height) or ½ }\left(\text{Q}\right)\text{×}\left(\text{change in price}\right)\hfill \\ =\mathrm{½}\left(2,000\right)\times \left(90-60\right)\hfill \\ =\$15,000\hfill \\ \text{Therefore, there is decrease in producer surplus }=\$60,000-\$15,000\hfill \\ =\$45,000\hfill \end{array}$

Producer surplus will decrease by $45,000

Economics Concept Introduction

Introduction: A benefit that a producer enjoys while selling goods in the market or amount that a producer receives from trade is called producer surplus.

e)

To determine

Tax revenue

Explanation of Solution

  $\begin{array}{l}\text{Tax revenue by the government = quantity sold×value of per unit tax}\hfill \\ =1000\times \$60\hfill \\ =\$60,000\hfill \end{array}$

After imposing excise tax, the government will collect $60,000 tax revenue.

Economics Concept Introduction

Introduction: Tax revenue is the earning which is collected by imposing or adding tax on the sale of goods.

f)

To determine

The deadweight loss

Explanation of Solution

  $\begin{array}{l}\text{Deadweight loss }=\mathrm{½}\left(P2-P1\right)\times \left(Q1-Q2\right)\hfill \\ \text{ = }0.5\left(\$60\right)\times \left(1000\right)\hfill \\ =\$30,000\hfill \end{array}$

The deadweight loss would be $30,000

Economics Concept Introduction

Introduction: When supply and demand are out of equilibrium then there is deadweight loss due to market inefficiency.