Consider the market for luxury yachts. The following graph shows the demand and
ID: 1168840 • Letter: C
Question
Consider the market for luxury yachts. The following graph shows the demand and supply for luxury before the government imposes any taxes. First, use the black point (plus symbol) to indicate the equilibrium price and quantity of luxury in the absence of a tax. Then use the green point (triangle symbol) to shade the area representing total consumer surplus (CS) at the equilibrium price. Next, use the purple point (diamond symbol) to shade the area representing total producer surplus (PS) at the equilibrium price.Explanation / Answer
Consumer Surplus (before tax) = 1/2* 30*16 = 240 Area under green colour
Producer Surplus (before tax) = 1/2* 90*16 = 720 Area under purple colour
Consumer Surplus (after tax) = 1/2* 15*8 = 60 Area under green colour in second graph with tax
Producer Surplus (before tax) = 1/2* 45*8 = 180 Area under pur[ple colour in second graph with tax
Revenue from Tax = 8*60 =480 Area of rectangle in 2nd diagram
Deadweight loss = 1/2*60*8 =240 Brown area
Note : all figures are in thousand $.