Let's calculate consumer and producer surpluses in a model of supply and demand. Consider the market for widgets, where the relationship between the quantity of widgets supplied and the price is given by the equation qs = 10p - 120. The relationship between the quantity of widgets demanded and the price is given by the equation Calculate the equilibrium price, p* = $ qD=180 - 5p. , and the quantity of widgets sold, q* = Now, using the "guide to taxation/inefficiency".pdf posted in the Content folder as a reference (particularly pages 2 and 3), we will calculate consumer and producer surplus. First, consider the maximum price that some consumer would be willing to pay for a widget. Then, take the minimum price that some producer would be willing to accept for a widget. Use these and the formulas provided to calculate consumer surplus, CS = $ and producer surplus, PS = $ D The government imposes an excise tax on widgets, so that they receive $3 for every widget sold. That is, for any price, consumer will pay $3 more per widget than producers receive. We can use only this information and the equations above to find the quantity sold, the price paid, and the price received. To do so, we need to find a single quantity such that consumers demand exactly that many widgets when their price paid is pe and such that producers are willing to provide exactly as many when their price received is pes. The key is to impose the constraint above: it must be that pe = Pe + 3. Consumers pay $3 more than producers receive. And for the quantities supplied and demanded to be identical, we need 10pe - 120 = 180 - 5pe D. S These are just the supply and demand equations above, with the appropriate new prices substituted in. Replacing pe with pes + 3 leaves you with one unknown (pes). Rearrange the equation to find Pes. Adding 3 gives us pe. Substituting back into the left-hand or right-hand side of the equation directly above will give you the quantity sold, qe. What are each of these? Pe S = $ S PD = $ de Again, using "guide to taxation/inefficiency" (now page 4), calculate consumer surplus, CS = $ revenue, R = $ and deadweight loss, DWL = $ producer surplus, PS = $ government