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1. Let us return to the butter market of Question 2 from Exercise 3: The demand for butter is given by: Qd = 20 -
1. Let us return to the butter market of Question 2 from Exercise 3: The demand for butter is given by: Qd = 20 - 0.05P And supply is given by: QS =- 10 + 0.20P Where P is pence per kilogram of butter, Q" is the number of kilograms of butter demanded per day, expressed in thousands and Q' is the number of kilograms of butter supplied per day, expressed in thousands. (a) Take the market equilibrium calculated in Exercise 3, Question 2 (a), as your starting point. Now suppose the government imposes a per unit sales tax of 20 pence per kilogram in the butter market. What are the implications for the market equilibrium price and quantity? (b) Who incurs the greater burden of the tax - consumers or producers? (c) Compute and interpret the deadweight loss of taxation in this market. (Note: the deadweight loss is also known as the excess burden)
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