4. (15 points) Consider the competitive market where demand is P 20 25Q and supp

Question

4. (15 points) Consider the competitive market where demand is P 20 25Q and supply is P-3 +.5Q. a. Analyze the effects on the equilibrium quantity, producer price Phy and consumer price Pg of a $1 per unit tax on producers. What is the tax revenue? b. Analyze the effects on the equilibrium quantity, producer price Pn, and consumer price P of a 20% ad valorem tax on producers, what is the tax revenue? c. Analyze the effects on the equilibrium quantity, producer price Pn, and consumer price Pg of a $1 per unit subsidy to consumers. What is the cost to the government?

Explanation / Answer

SOLUTION:

1) Answer:

In a competitive market,an equilibrium where Qd = Qs

Thus 20-0.25q=3+0.5Q

0.25Q + 0.5Q = 17

Q=22.67

Producer price Pn=(3+(0.5X22.67)=14.335

Consumer price pg=(20-(0.25X22.67)=14.335

When $1 per unit tax on producers

Equilibrium quantity will decrease to 21.67 units

Producer price will increase to $15.335 (=14.335+1)

Consumer price will rise to $15.335 (=14.335+1)

PART-2)

Equilibrium quantity will decrease to 18.136 units (=20%*22.67)

Producer price will increase to $2.867 (=20% * 14.335)

Consumer price will rise to $2.867 (=20% * 14.335)

PART-3)

Equilibrium quantity will rise by 22.67 units to 45.34 units

Producer price will fall by $1 to to $13.335 (=14.335 -1)

Consumer price will fall by $1 to to $13.335 (=14.335 -1)

Total cost to government= 22.677 (=$1*22.677)

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