Assume the following linear demand and supply functions of a good respectively, Q=20-P and Q=-2+P, where Q is the quantity and P is the price. Assume that there is a two-dollar unit tax on buyersa. What is the market price and quantity of the good after the consumption tax? Calculate the consumer and producer surplus after the tax. ?b. What is the deadweight loss because of the tax ?

In the free market, the equilibrium price and quantity are determined by the forces of demand and…

Answered: Assume the following linear demand and…

Principles of Microeconomics

7th Edition

ISBN:9781305156050

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter8: Application: The Cost Of Taxation

Section: Chapter Questions

Problem 8PA

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Assume the following linear demand and supply functions of a good respectively, Q=20-P and Q=-2+P, where Q is the quantity and P is the price. Assume that there is a two-dollar unit tax on buyers

a. What is the market price and quantity of the good after the consumption tax? Calculate the consumer and producer surplus after the tax. ?

b. What is the deadweight loss because of the tax ?

Definition Definition Consumer surplus is the consumers' gain from trade. The consumer surplus is the area below the demand curve but above the equilibrium price, up to the equilibrium quantity. Producer surplus is the producer's gain from trade. The producer surplus is the area above the supply curve but below the equilibrium price, up to the equilibrium quantity. Consumer surplus is represented by Area A and producer surplus is represented by Area B.

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