Let’s return to our market for cars. Suppose the demand and supply curve for cars were given by the following two equations respectively:
D (p) = 16, 000 − 0.2p
S (p) = −2, 000 + p
a) (10 marks) Determine the free market equilibrium price for cars in this market, and the amount of cars that are sold. Calculate the consumer surplus and producer surplus.
b) (15 marks) Suppose the government imposed a tax of Ï„ = $6, 000 on the price of a new car. Calculate the new equilibrium in this market. This includes finding
The new equilibrium quantity sold.
The price paid by consumers.
The price received by firms.
The consumer surplus.
The producer surplus.
The amount of tax collected by the government.
The deadweight loss.
c) (5 marks) Discuss what the deadweight loss represents and why it exists.
d) (5 marks) In this scenario, who pays a larger share of the tax and why? A full answer will involve a discussion of elasticity.
