Suppose you are hired by the Martin guitar company as an economic consultant. Yo
ID: 1207777 • Letter: S
Question
Suppose you are hired by the Martin guitar company as an economic consultant. You estimate the demand for Martin guitars to be Q = 8000 - 2P. Suppose the supply of Martin Guitars is given by Q = -2000 +3P. What is the equilibrium price of Martin guitars?
What is the equilibrium quantity of Martin guitars?
What is the price elasticity of demand at the equilibrium price and quantity?
What is the price elasticity of supply at the equilibrium price and quantity?
For the next seven questions, suppose a per-unit excise tax of $40 per guitar is levied on the consumers.
What price will sellers receive after the tax is levied?
What price will consumers pay after the tax is levied?
What percent of the tax will be paid by the consumers of Martin guitars? (give an answer between 0 and 100)
What percent of the tax will be paid by the suppliers of Martin guitars? (give an answer between 0 and 100)
How many guitars will be sold after the tax is imposed?
How much consumer surplus do consumers get after the tax?
What is the deadweight loss created by this tax?
Explanation / Answer
What is the equilibrium quantity of Martin guitars?
For equilibrium
Qs =Qd
-2000 +3P = 8000 - 2P
5P = 10,000
P = 2,000
and Q = 4,000
What is the price elasticity of demand at the equilibrium price and quantity?
ed = dQd/dP = Cofficient of P = -2
What is the price elasticity of supply at the equilibrium price and quantity?
es = dQs/dP = Cofficient of P = 3
For the next seven questions, suppose a per-unit excise tax of $40 per guitar is levied on the consumers.
What price will sellers receive after the tax is levied?
P = 2000 - 40 = 1,960
What price will consumers pay after the tax is levied?
P = 2000 + 40 = 2,040
What percent of the tax will be paid by the consumers of Martin guitars? (give an answer between 0 and 100)
= ed/es+ed = 2/5 = 40%
What percent of the tax will be paid by the suppliers of Martin guitars? (give an answer between 0 and 100)
= es/es+ed = 3/5 = 60%
How many guitars will be sold after the tax is imposed?
qD = 8000 - 2*2,040 = 3,920
How much consumer surplus do consumers get after the tax?
CONSUMER SURPLUS = 1/2(vertical intercept - Price)*Q = 1/2(8000 - 2040)*3,920 = 11,681,000
What is the deadweight loss created by this tax
Dead wweight Loss = change in quantity*change in Price
= (4000 - 3960)(2040 -2000) = 80*40 = 3200
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