First Problem The number of bottles of chardonnay demanded per year is $1, 000,
ID: 1204491 • Letter: F
Question
First Problem The number of bottles of chardonnay demanded per year is $1, 000, 000 60, 000P , where P is the price per bottle (in U.S. dollars). The number of bottles supplied is 40, 000P. 1. What is the equilibrium price? What is the equilibrium quantity? 2. Suppose that the government introduces a new tax such that the wine maker must pay a tax of $5 per bottle for every bottle that he produces. What is the new equilibrium price paid by consumers? What is the new price received by suppliers? What is the new equilibrium quantity? 3. How much is the tax collected by the government? How much is the deadweight loss?
Explanation / Answer
QD = 1,000,000-60,000P
QS = 40,000P
1)
Equilibrium occurs where DD=SS
That is, 1000000-60000P = 40000P
This gives: P*=$10 and Q*=400,000 units.
2)
Tax on suppliers = $5 per unit
New supply equation: S=40,000(P-5) = 40,000P-200,000
New equilibrium: DD=SS
That is, 1000000-60000P = 40000P-200,000
This gives: P*=$12
This is the actual price paid by the consumer, the price that is actually received by the supplier is P - T or 12-5 = $7.
To find the equilibrium quantity substitute P = 12 back into the original equations: Q*=280,000 units.
3)
Tax revenue = Tax(Q*) = 5(280,000) = $1,400,000
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