Question
1. Consider the demand and supply for eighth-ounce bags of high-quality cannabis flower. Suppose that the market for eighth-ounce bags of cannabis is competitive, with
1. Consider the demand and supply for eighth-ounce bags of high-quality cannabis flower. Suppose that the market for eighth-ounce bags of cannabis is competitive, with market inverse supply given by P = 10 + Q and market inverse demand given by P = 76 - 2Q. Where prices (P) are measured in dollars, and quantities (Q) are measured in thousands of eighth-ounce bags.
To raise revenue, the government levies a tax on sellers of eighth-ounce bags of cannabis, and the size of the tax is 20 percent of the price.
c. Solve for the new market equilibrium quantity of eighth-ounce bags of cannabis after the tax is imposed in this market and support your answer graphically (make sure to label all curves and relevant points).
d. What is the new market equilibrium price that buyers pay (including the tax), and what is the price that sellers receive after the tax is paid to the government?
e. Derive the consumer surplus, producer surplus, and tax revenue after the tax is imposed.
f. What is the deadweight loss (DWL) as a result of the tax?
g. Describe why the market fails to be efficient in the context of this tax.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started