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deadweight loss from the tax

MicroEconomics Exercises

1) Price Ceiling
A local market for three-bedroom rental units is depicted by the following demand and supply equations:
Qd = 2000-P
Qs = -1000+P
where P is the rental price in dollars and Q represents the number of rental units.

a) What is the equilibrium rental price and quantity of three-bedroom apartments?

Now, suppose that, in an attempt to provide affordable housing, the local municipality imposes a ceiling of $1,250 for the rental price of three-bedroom apartments.

b) What is the availability of three-bedroom rental units at this price?
c) What is the demand for these units at the government-mandated price?
d) What is the change in consumer and producer surplus associated with the rental policy change? (Calculate the dollar amount of the change in consumer surplus and the dollar amount of the change in producer surplus.)
e) What is the change in total surplus associated with the rental policy change? (Calculate the dollar amount of the change in total surplus.)
f) Do you think the rental policy change would increase or decrease landlords' incentives to improve the quality of three-bedroom rental units? Explain.

2) Price Floor
Suppose the demand and supply of fast food employees is depicted by the following equations:
Ld = 1000-100w (labor demand curve)
Ls = -500+200w (labor supply curve)
where L depicts the number of employees and w depicts the hourly wage rate for fast food workers.

a) What is the equilibrium wage and employment level for this example?

Now, suppose that Congress passed legislation increasing the minimum wage level to $5.15 an hour.

b) What is the new employment level when the minimum wage law is imposed?
c) What is the difference in the number of individuals willing to work at the minimum wage and the demand for workers at this wage rate?
d) Who is better off with the minimum wage law?
e) Who is worse off with the minimum wage law?

1) Tax
A country that does not currently tax cigarettes is considering the introduction of a $0.40 per pack tax. The economic advisors to the country estimate the supply and demand curves for cigarettes as:
Qd = 140,000-25,000P
Qs = 20,000+75,000P
where Q= daily sales in packs of cigarettes and P = price per pack. The country has hired you to provide the following information regarding the cigarette market and the proposed tax:

a) What are the equilibrium price and quantity with no tax?
b) What price and quantity would prevail after the imposition of the tax? What portion of the tax would be borne by buyers and sellers, respectively?
c) Calculate the deadweight loss from the tax. Could the tax be justified despite the deadweight loss? What tax revenue will be generated?

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Solution Summary

Calculate the deadweight loss from the tax. Could the tax be justified despite the deadweight loss? What tax revenue will be generated?

$2.19