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Finding consumer surplus and Govt's revenue

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1. If Q=460-4P,
What is consumer surplus when P=$35 & $25 respectively?
what happens to consumer surplus when price of a good decreases?

2. If Qs= 0.25P-0.5 and Qd=7-0.5P
Suppose a $6/unit excise tax is imposed on the good, what is the new equilibrium price and how much revenue does the govt receive from this tax?

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Solution Summary

There are two problems. Solution to first problem explains the steps to find out consumer surplus at given price levels. Solution to second problem depicts the steps to find out new equilibrium price and quantity after a tax is imposed. It also calculates government's revenue.

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1. If Q=460-4P,
What is consumer surplus when P=$35 & $25 respectively?

First find the point where Qdx=0
Q = 460 - 4Px
Put Q=0
460-4P=0
4P=460
P=115

Q at P=$35 will be given by
Q=460-4*35=320

Given that demand curve is linear. Consumer surplus is found by finding area of triangle between demand curve and price.

Area of triangle= ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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