Pracitce questions tutorial 6 Flashcards
: Figure 1 below shows the demand and supply of coffee.
(a) What are the equilibrium price and quantity?
(b) Suppose the government levies a sales tax of 100% (if the producer price is $1,
the producer would have to charge the consumer an extra $1, so the new
consumer price will be $2). What are the new equilibrium price and quantity?
(c) What are the changes in the consumer and producer surpluses?
(d) How much is the tax revenue, and the deadweight loss of the tax?
(a) $5, 6 tons
(b) $6, 4 tons. Note that this is a percentage tax, not a per unit tax. So the S curve
pivots to the left.
(c) Consumer surplus falls by $5; producer surplus falls by $10
(d) Tax revenue = $12; deadweight loss = $3
PHOTO IN FAVOURITES 11/9/18
: In Figure 2 below, assume that the government imposes an import quota of 20
baskets.
(a) What is the equilibrium price and quantity of baskets after the quota is imposed?
(b) What is the change in the quantity of baskets imported after the quota?
(c) What are the changes in the consumer and producer surpluses?
(d) What is the amount of deadweight loss due to the quota?
(e) How does an import quota differ from an equivalent tariff?
(a) $7, 70 baskets
(b) Before quota = 66; after quota = 20; quantity falls by 46 after quota
(c) CS before quota= $355 (round down); CS after quota = $189; CS falls by $166.
PS before quota =$45; PS after quota=$125; PS rises by $80
(d) $46
(e) The tariff raises revenue for the government, while the import quota creates
surplus for license holders.
PHOTO IN FAVOURITES 11/9/18
