Option 2

Remember that a correctly labeled graph requires that you label all axes, curves, and equilibrium point values. The word "calculate" means you must show your work.

Assume the market for Good Z is in equilibrium. The demand for Good Z is unit elastic, and the supply is relatively elastic.

(a) Draw a correctly labeled demand and supply graph for Good Z. Label the equilibrium price P_e and the equilibrium quantity Q_e.

(b) Assume the government imposes a per-unit tax on Good Z. On your graph from part (a), show each of the following after the tax has been implemented.

(i) The equilibrium buyer's price labeled P_t

(ii) The equilibrium quantity labeled Q_t

(iii) The area representing the new producer surplus, shaded completely

(iv) The area representing deadweight loss, labeled DWL

(c) Assume that the seller's price after the tax is 2000 dollars, that the quantity supplied at this price is 50 units of Good Z, and that the minimum price on the supply curve (where it meets the y-axis) is 1000 dollars. Calculate the area of producer surplus.

(d) Will the price paid by consumers increase by the same amount as the tax? Explain.

(e) Will the loss in consumer and producer surplus be greater than, less than, or equal to the tax revenue collected by the government? Explain.