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6 November, 01:53

The Dominican Republic is considering placing a room tax on Eco Hotels. The preliminary analysis requires them to calculate consumer and producer surplus before the tax. Below are the demand and supply equations for eco hotel rooms in the Dominican Republic.

Demand equation: Qd = 2500 - 5P

Supply equation: Qs = 1OP - 500

Calculate consumer surplus. Number

Calculate producer surplus.

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  1. 6 November, 02:17
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    The consumer surplus is 225,000

    The producer surplus is 112,500

    Explanation:

    According to the given data we have the following:

    Demand equation: Qd = 2500 - 5P

    Supply equation: Qs = 1OP - 500

    Therefore, the equilibrium is at demand equal to the supply

    2500-5P=10P-500

    15P=3000

    P=200

    Q=10P-500=10*200-500=1500

    The inverse demand function is

    P=500-0.2Q

    Therefore, CS=0.5 * (Pmax - Pe) * Qe

    =0.5 * (500-200) * 1500

    =225,000

    The consumer surplus is 225,000

    Regarding PS, maximum price or y-intercept of the demand curve

    Pe and Qe are equilibrium price and quantity the inverse supply curve

    P=50+0.1Q

    PS=0.5 * (Pe-Pl) Qe

    Pl=y intercept of supply curve

    PS=0.5 * (200-50) * 1500

    =112,500

    The producer surplus is 112,500
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