Question 1

1. Understanding the implications of taxes on welfare The following graph represents the demand and supply for blinkies (an imaginary product). The black point (plus symbol) indicates the pre-tax equilibrium. Suppose the government has just decided to impose a tax on this market; the grey points (star symbol) indicate the after-tax scenario. (?) Demand Supply 6.00 48.00 47m PRICE (Dollars per blinkie) 40.00 QUANTITY (Blinkies) Complete the following table, given the information presented on the graph. Result Value Per-unit tax $ Equilibrium quantity before tax Price consumers pay before tax $In the following table, indicate which areas on the previous graph correspond to each concept. Check all that apply. Concept A B C D E F Deadweight loss after the tax is imposed O O O Producer surplus after the tax is imposed O O O O O O Consumer surplus before the tax is imposed O O 0 O2. Taxes and welfare Consider the market for air conditioning units. The following graph shows the demand and supply for air conditioning units before the government imposes any taxes. First, use the black point (plus symbol) to indicate the egquilibrium price and quantity of air conditioning units in the absence of a tax. Then use the green point (triangle symbol) to shade the area representing total consumer surplus (C5) at the equilibrivm price. Next, use the purple point (diamond symbol) to shade the area representing total producer surplus (P5) at the equilibrium price. @ Before Tax 200 =+ 380 . 320 Equilibrium T Demand 5 2a0 A = = g 240 Consumer Surplus 5 2 o o g I 180 & Supply Producer Surplus w120 = o B w0 40 0 o 200 400 G300 BOO 1000 1200 1400 1500 1300 2000 QUANTITY (Air condifioners) Suppose the government imposes an excise tax on air conditioning units. The black line on the following graph shows the tax wedge created by a tax of $80 per air conditioner. First, use the tan guadrilateral (dash symbols) to shade the area representing tax revenue. Next, use the green point (triangle symbol) to shade the area representing total consumer surplus after the tax. Then, use the purple point (diamond symbol) to shade the ares representing total producer surplus after the tax. Finally, use the black point (plus symbol) to shade the srea representing deadweight loss. @ After Tax 40 38 2 Tax Revenue T Demand 5 = = = 2 B 24 Consumer Surplus 5 & 20 Tax Wedge - o g = 18 Producer Surplus Q"" Supply 3 - - = o e Deadweight Loss 40 0 200 400 G800 200 1000 1200 1400 1800 1300 2000 QUANTITY (Air condifioners) Complete the following table by using the previous graphs to determine the values of consumer and producer surplus before the tax, and consumer surplus, producer surplus, tax revenue, and deadweight loss after the tax. Mote: You can determine the areas of different portions of the graph by selecting the relevant area. Before Tax After Tax (Dollars) (Dollars) Consumer Surplus Producer Surplus Tax Revenue o Deadweight Loss 0