26 Jul HOW MUCH OF THE DEAD WEIGHT LOSS IS ATTRIBUTED TO SELLERS?
Consider a market for a perfectly elastic good. Suppose the initial supply and demand curves on this Show more Consider a market for a perfectly elastic good. Suppose the initial supply and demand curves on this good are given by the following: Supply: P = 5 + Q Demand: P = 8 Suppose there is a $1 tax on sellers so the supply curve becomes: Supply: P = 6 + Q a. What is the consumer surplus equal to after the tax? What about the producer surplus? b. On a supply and demand diagram find the location of the deadweight loss. How much of the deadweight loss is attributed to buyers? How much of the dead weight loss is attributed to sellers? c. Now suppose that instead the demand curve was perfectly inelastic. The demand curve is equal to: Demand: Q = 3 The supply curve remains the same both before and after the tax. Draw a supply and demand diagram illustrating this market. Be sure to include the supply curve before the tax and after the tax. d. Label the consumer surplus producer surplus and government revenue after the tax. What is the deadweight loss from the tax? e. As the demand curve becomes more elastic who pays more of the tax buyers or sellers? (Hint: Think about what happens to the change in CS/PS as a result of the tax) Show less
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