Essentials of Economics (MindTap Course List)
8th Edition
ISBN: 9781337091992
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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Question
Chapter 8, Problem 8PA
To determine
The impact of subsidy on the commodity.
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In this module, we learned about deadweight loss and analyzed the welfare effects of a tax on a good. Now consider the opposite policy. Suppose that the government subsidizes a good: For each unit of the good sold, the government pays $2 to the buyer. How does the subsidy affect consumer surplus, producer surplus, tax revenue, and total surplus? Does a subsidy lead to a deadweight loss? Why or why not?
The supply of headphones is linear and upward sloping, and the demand for headphones is linear and downward sloping. Suppose the
government imposes a per-unit tax in the market for headphones. In this market, the tax decreases consumer surplus by $5,200.00, and
it decreases producer surplus by $2,800.00. The tax decreased the equilibrium quantity of the good by 1,200.00 headphones, and it
generated a deadweight loss of $2,400.00. The tax revenue generated by this tax is $
Part 2
The per-unit tax in the market for headphones must be $
Part 3
With the tax in place, the total number of headphones traded in the market is
headphones.
The demand and supply equations for a product are: Q* =
0.2
300 – 6P and Q' = -40 + 6P.
Determine the market equilibrium and draw graphs.
Suppose that the government decides to impose a flat tax of
10% on each unit sold. Show that the price that consumers pay
would be the same if the government imposed a tax of Rs.
1.70 per unit sold. Draw graphs and explain.
Also calculate the total revenue earned by sellers before and
after the tax, the tax revenue raised by the government,
changes in consumer and producers surplus and dead weight
loss.
Chapter 8 Solutions
Essentials of Economics (MindTap Course List)
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