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1. SUPPLY AND DEMAND & TAXES (25 points) Market supply and demand for renting apartments in Hyde Park are given as follows: p5 = 1000
1. SUPPLY AND DEMAND & TAXES (25 points) Market supply and demand for renting apartments in Hyde Park are given as follows: p5 = 1000 + Q pp = 3700 - 2Q where P is the price of an apartment and @ the quantity of apartments. (a) On a graph with price on the y axis and quantity on the x axis, draw the supply and demand curves. Compute the equilibrium price and equilibrium quantity of apartments, and label it on the graph. (5 points) (b) Calculate the consumer surplus] and producer surplus. (5 points) (c) The government decides to charge a $90 tax per apartment on apartment owners (suppliers). Compute the new equilibrium price that renters pay and the (long- run) equilibrium quantity of apartments under this policy. What is the incidence of the tax (i.e., what share of the tax is paid by consumers vs producers)? When determining the new (long-run) equilibrium price and quantity, assume that sup- pliers can fully adjust to the impact of a tax, using the information given by the supply curve (and assume there is no black market that avoids taxes). (10 points) (d) If the tax were increased to $900 per apartment, what would happen to the deadweight loss as a share of revenue generated? (You do not need to calculate the deadweight loss as a share of revenue, but just give the intuition of what happens and why.) (5 points)
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