Economics 105

Homework #2

1. The following problem deals with the economic effects of imposing a specific tax.

Table 1

P Q^D Q^S(no tax) Q^S(tax)

$15 0 240

14 40 220

13 80 200

12 120 180

11 160 160

10 200 140

9 240 120

8 280 100

7 320 80

a. Draw a supply-demand graph for Table 1 and label the equilibrium price and quantity with numbers.

b. Calculate the producers' surplus (PS) and the consumers' surplus (CS).

c. Suppose that a specific tax of $3 per unit is levied on producers. After the market completely adjusts to the tax, do the following:

(1) Fill in the numbers for the new supply curve (Qs-tax) and draw the new supply curve on your graph for 1.a. Identify the new equilibrium price and quantity.

(2) Calculate the welfare loss (WL) caused by the tax and indicate the area associated with the welfare loss on the graph.

(3) Calculate the PS and CS and compare to 1.b.

(4) Calculate the amount of tax revenue collected.

2. Using the numbers from the previous example (the no-tax supply), assume a price ceiling is imposed at $7.

a. Draw a graph of this situation and label with the appropriate numbers, indicating the amount of the excess demand (ED).

b. Calculate the size of the PS and CS when the price ceiling is in effect.

c. Calculate the welfare loss (aka the deadweight loss) and indicate the area on the graph corresponding to this welfare loss.