2. Assume that the market for coffee is perfectly competitive. The current market clearing price is $5 per cup and there are 5000 cups sold at this price per day. The market supply curve is QS = 1000 + 800P. The slope of the demand curve is dQ = -200 dP Quota The government would like to reduce coffee consumption. One way to do so would be to impose a quota in the market. Specifically, the government restricts consumption of coffee to 4000 cups per day. Assume that the price of coffee will rise to the consumers' willingness to pay for 4000 cups. a) If the market price equals the willingness to pay for 4000 then what will be the new price of coffee? Illustrate the impact of the quota on price and quantity in a diagram. For the table below you DO NOT need to calculate the values of any surplus amounts. You DO need to label the areas in your diagram and use those labels in the table. b) Fill in the table below. Before Quota After Quota Consumer Surplus Producer Surplus c) Calculate the (numerical) value of the loss of consumer surplus. One way to implement a quota is for the government to issue ration coupons to consumers. A consumer can only purchase a cup of coffee if she has a coupon. d) If every consumer received the same number of coupons, then do you think that your calculation of the loss of consumer surplus in (e) accurately reflects the loss of consumer surplus? Briefly explain. Tax An alternative way to discourage consumption would be to raise the price by imposing a tax. Specifically, the tax is set at $5 per cup. There is NO quota. e) Illustrate the impact of the $5 tax on price and quantity. f) Will the price that consumers pay rise to $10 per cup? Briefly explain. g) Illustrate the government revenues of the $5 tax in your diagram. h) What value would the tax need to be in order to raise the price to $5 per cup? How much of that tax would consumers pay? How much would firms pay? i) Use the formula for the relative burden of a tax to show that consumers always pay four times as much of the tax as firms. 2. Assume that the market for coffee is perfectly competitive. The current market clearing price is $5 per cup and there are 5000 cups sold at this price per day. The market supply curve is QS = 1000 + 800P. The slope of the demand curve is dQ = -200 dP Quota The government would like to reduce coffee consumption. One way to do so would be to impose a quota in the market. Specifically, the government restricts consumption of coffee to 4000 cups per day. Assume that the price of coffee will rise to the consumers' willingness to pay for 4000 cups. a) If the market price equals the willingness to pay for 4000 then what will be the new price of coffee? Illustrate the impact of the quota on price and quantity in a diagram. For the table below you DO NOT need to calculate the values of any surplus amounts. You DO need to label the areas in your diagram and use those labels in the table. b) Fill in the table below. Before Quota After Quota Consumer Surplus Producer Surplus c) Calculate the (numerical) value of the loss of consumer surplus. One way to implement a quota is for the government to issue ration coupons to consumers. A consumer can only purchase a cup of coffee if she has a coupon. d) If every consumer received the same number of coupons, then do you think that your calculation of the loss of consumer surplus in (e) accurately reflects the loss of consumer surplus? Briefly explain. Tax An alternative way to discourage consumption would be to raise the price by imposing a tax. Specifically, the tax is set at $5 per cup. There is NO quota. e) Illustrate the impact of the $5 tax on price and quantity. f) Will the price that consumers pay rise to $10 per cup? Briefly explain. g) Illustrate the government revenues of the $5 tax in your diagram. h) What value would the tax need to be in order to raise the price to $5 per cup? How much of that tax would consumers pay? How much would firms pay? i) Use the formula for the relative burden of a tax to show that consumers always pay four times as much of the tax as firms