Brown guitar company hires you to consult and you estimate the demand for guitars to be Q=9000-6P. The supply of guitars is given by Q= -3000+9.

1 What is the equilibrium price and quantity of guitars?

2 What is the price elasticity of demand at the equilibrium price and quantity?

3 What is the price elasticity of supply at the equilibrium price and quantity?

If a per-unit excise tax of $ 90.00 per guitar is levied on the consumers, what price would consumers pay after the tax is levied ? What proportion of tax will be paid by the supplies of guitars? How many guitars will be sold after tax is imposed? How much consumer surplus do consumers get after the tax? What is the dead weight loss created by tax?

Solution Preview

Please refer attached file for graph and tables.

1 What is the equilibrium price and quantity of guitars?
Qd=9000-6P
Qs=-3000+9P
In equilibrium Qs=Qd
-3000+9P=9000-6P
15P=12000
P=800
Qd=9000-6*800=4200
Qs=-3000+9*800=4200

Equilibrium quantity=4200
Equilibrium price=$800

2 What is the price elasticity of demand at the equilibrium price and quantity?
Equilibrium Price, P=800
Equilibrium Quantity, Q=4200

Qd=9000-6P
On differentiating with respect to P, we get
dQd/dP=-6
Price elasticity of ...

Solution Summary

Solution determines equilibrium parameters, price elasticity of demand and supply and dead weight loss created by tax.

... equilibrium price and quantity can be calculated by solving ... d. Calculate the dead weight loss (or excess burden ... The deadweight loss is the area of the triangle ...

Calculating dead weight loss (lost efficiency.). ... colors because it will be easy to calculate the area ... zones, it should be fairly clear how to calculate the area ...

...Calculate the effective tariff rate ... triangles in the above diagram represent the net loss which collectively measures the deadweight loss from the ...

...Calculate the equilibrium price and quantity ... what occurs to consumer surplus, producer surplus, and deadweight loss. ... levels are different as in case of monopoly ...

... problem 2, indicate whether CS, PS, total surplus and dead weight loss would each ... This value will later be used in order to calculate the deadweight loss. ...

... We have calculated in part(a), p=15 and q ... 20-15)*5=$12.5 Let us calculate marginal cost ...Deadweight loss=TR (Pure competition)-TR (Monopolistic competition)=66.66 ...

... To calculate the surpluses it is a good idea to plot ... Here is the graph in the case with no ... the sum total of consumer and producer surplus and deadweight loss. ...

... get the corresponding Q, calculate TR then calculate MR by ... net loss to society is the dead weight loss from consumer ... at about 70 and so the DW loss triangle is ...