Further practice on HL supply and demand functions
Q1. (scroll to next page to check answers)
a) Assume that the market for a product is originally described using the
following demand and supply functions:
Qd = 200 – P
Qs = 20 + 2P
b) Calculate equilibrium price and quantity
c) Complete a demand and supply schedule using the following prices $0, 20,
40, 60, 80, 100, 120, 140, 160, 180 & $200
d) Plot the demand and supply curve from the above schedule and show
equilibrium price and quantity.
e) Assume that an indirect tax of $15 per unit is imposed- plot the new supply
curve on to your graph above (try to be as accurate as possible)
f) From your graph determine the new equilibrium price and quantity
g) What proportion of the tax per unit is paid by consumers? And what is their
total tax incidence (or burden)?
h) What proportion of the tax per unit is paid by producers? And what is their
total tax incidence (or burden)?
i) How much tax revenue does the government collect?
j) Calculate the change in producer revenue as a result of the tax.
k) Calculate the change in consumer expenditure as a result of the tax.
l) Calculate the change in consumer surplus as a result of the tax (I know we
haven’t done this before but you should recognize the areas of consumer
surplus from your graph- and then calculate these areas (area of a triangle?))
m) Calculate the change in producer surplus as a result of the tax. (same hint as
above).
n) Calculate the area of welfare (or deadweight loss).
Q1. Answers
a) On your graph paper
b) Price = $60 and quantity = 140 units
c)
Price
Quantity demanded
0
200
20
180
40
160
60
140
80
120
100
100
120
80
140
60
160
40
180
20
200
0
d)
e)
f)
g)
Quantity supplied
20
60
100
140
180
220
260
300
340
380
420
On your graph paper
On your graph paper
New price = $70 & new quantity = 130 units
Prop. Of tax paid by consumers = 2/3. Total tax burden for consumers = $10
x 130 units = $1300
h) Prop. Of tax paid by producers = 1/3. Total tax burden for producers = $5 x
130 units = $650
i) Government revenue from tax = $15 x 130 = $1950
j) Change in producer revenue = $8,400 - $7150 = $1250 less
k) Change in consumer exp. = $8,400 - $9,100 = $700 more
l) Change in consumer surplus = $9,800 - $8,450 = $1350
m) Change in producer surplus = $4,800 - $4,125 = $675
n) Welfare loss = ($1350 + 675) - $ 1950 = $75