I. (20 points) Let /\" denote the price of n good. The supply is given liy 2s 1\

Question

I. (20 points) Let /" denote the price of n good. The supply is given liy 2s 1". and the, demand is iven by ?18 - P. (a) What is the equilibrium price of the good? (b) Suppose that the government imposes n price floor above the equilibrium price. there be a shortage or a surplus of the good? Explnin briefly. c) Supposc that the government imposes an excise tax of 6 on sellers. That is, sellers must pay the government G for each unit sold. What is the quantity bought ancd so with the tax? (d) Suppose that the government imposes an excise tax of G on sellers. That is, seller must pay the government 6 for each unit sold. Wha taxation? t is the deadweight loss of

Explanation / Answer

(a) In equilibrium, QD = QS

18 - P = P

2P = 18

P = 9

Q = 18 - 9 = 9

(b) Sine a price floor is imposed above equilibrium price, at the higher price, quantity demanded will fall but quantity supplied will rise, so there will be a surplus (excess supply) in market.

(c) The tax will lower effective price received by sellers by 6 per unit, shifting supply curve leftward by 6 at every output level. New supply function will be

QS = P - 6

Equating with QD,

18 - P = P - 6

2P = 24

P = 12 (Price paid by buyers)

Price received by sellers = 12 - 6 = 6

Q = 18 - 12 = 6

(d) Deadweight loss = (1/2) x Change in price x Change in quantity

= (1/2) x (12 - 9) x (9 - 6) = (1/2) x 3 x 3 = 4.5

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