1)Suppose a $4 sales tax is imposed in the following market:

P

16

15

14

13

12

11

10

9

8

7

6

5

4

3

2

1

0

QD

0

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

P

16

15

14

13

12

11

10

9

8

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6

5

4

3

2

1

0

QS

16

15

14

13

12

11

10

9

8

7

6

5

4

3

2

1

0

a)Draw a graph showing the original supply curve, the new supply curve, and the demand curve (3 points).

b)Calculate and show on the graph the deadweight loss resulting from the tax based on the original price and quantity. (2 points)

c)Calculate and show on the graph the amount of revenue collected by the government. (2 points)

d)Calculate and show on the graph the consumer and producer surplus after the tax. (4 points)

2)Suppose that the government imposes a subsidy of $1 per pound of fish and gives the subsidy to fish producers. Draw a supply-demand diagram to illustrate the market effects of the subsidy. (4 points)

3)"The poor are the ones who suffer from high gas and electricity bills. We should pass a law that gas and electricity rates cannot increase by more than 1 percent annually." Evaluate this statement in terms of supply and demand analysis, assuming that equilibrium prices rise faster than 1 percent annually. (2 points)

4)"Consumer understandably like lower prices, but they should understand there is a great difference between a lower price produced by a government price ceiling and a lower price that comes about through normal market channels; one benefits the consumer, the other may not." Use an analysis of rent control to evaluate this statement. (2 points)