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21 October, 05:15

Suppose the market demand is QD = 200 - P and market supply is QS = 4P - 100.

A. Suppose the government imposes a tax of t = 5 on producers. What is the incidence of the tax on consumers? Producers?

B. What is the deadweight loss of the tax?

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  1. 21 October, 05:47
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    Answer & Explanation:

    Before the tax, the equilibrium price and quantity are:

    P*=$60

    Q * = 140

    With $5 tax on producers, the market supply after tax is:

    P=25 + (QS/4) + 5

    P=30 + (QS/4)

    The new equilibrium quantity would be:

    30 + (QS/4) = 200-QD

    as QD=QS

    Q**=136

    Price that producers receive : P=25 + (QS/4)

    P=25 + (136/4)

    Pp=$59

    Price that consumers pay : P=200-QD

    P=200-136

    Pc=$64

    A.

    Consumer's tax incidence = ($64 - $60) x 136 = $544

    Producer's tax incidence = ($60 - $59) x 136 = $136

    B.

    Deadweight loss is: 1/2 x ($64-$59) x (140 - 136) = $10
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