A firm faces the following average revenue (demand) curve: P = 120 − 0.02Q where Q is weekly production and P is price, measured in cents per unit. The firm’s cost function is given by C = 60Q + 25,000. Assume that the firm maximizes profits. i. What is the level of production, price, and total profit per week? ii. If the government decides to levy a tax of 14 cents per unit on this product, what will be the new level of production, price, and profit?
A firm faces the following average revenue (
P = 120 − 0.02Q
where Q is weekly production and P is price, measured in cents per unit. The firm’s cost
function is given by C = 60Q + 25,000. Assume that the firm maximizes profits.
i. What is the level of production, price, and total profit per week?
ii. If the government decides to levy a tax of 14 cents per unit on this product, what will be the
new level of production, price, and profit?
b. The United States currently imports all of its coffee. The annual demand for coffee by U.S.
consumers is given by the demand curve Q = 250 – 10P, where Q is quantity (in millions of
pounds) and P is the market price per pound of coffee. World producers can harvest and ship
coffee to U.S. distributors at a constant marginal (= average) cost of $8 per pound. U.S.
distributors can in turn distribute coffee for a constant $2 per pound. The U.S. coffee market is
competitive. Congress is considering a tariff on coffee imports of $2 per pound.
i. If there is no tariff, how much do consumers pay for a pound of coffee? What is the quantity
demanded?
ii. If the tariff is imposed, how much will consumers pay for a pound of coffee? What is the
quantity demanded?
iii. Calculate the lost consumer surplus.
iv. Calculate the tax revenue collected by the government.
v. Does the tariff result in a net gain or a net loss to society as a whole?
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