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Suppose you are an aid to a government official deciding on some recently proposed excise tax on the welfare of her constituents. One way of measuring the impact on her constituents is to determine how that tax change affects the level of consumer surplus enjoyed by her citizens in her area. By using a formal analysis and estimates of demand and supply:
Q (demand) = 500 - 5P and Q (supply) = 2P- 60

1. Graph the supply and demand curves
2. What are the equilibrium quantity and equilibrium price?
3. How much consumer surplus exists in this market?
4. IF a $2 excise tax is levied on this good, what will happen to the equilibrium price and quantity?
5. What will the consumer surplus be after the tax?

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Solution Summary

Use estimates of demand and supply.

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Political economy - answers:

1) Given, Q (demand) = 500 - 5P and Q (supply) = 2P- 60, the equilibrium quantity & equilibrium price can be determined by equating the demand & supply equations.
500-5P = 2p - 60
560 = 7P
P = 560/7
P = $ 80 .
Thus the equilibrium price =$ 80
Equilibrium quantity can be calculated by substituting the equilibrium price in either demand or supply equation.
Q(demand) = 500-5p
= 500-5*80
Equilibrium quantity= 500 -400
= 100 units.

2) The supply & demand curves can be shown in the graph as follows. ...

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