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Suppose that we have a market with Demand given by: Q = 4,000 200;) And Supply given by: (J = 100p 500 1. Draw both
Suppose that we have a market with Demand given by: Q = 4,000 200;) And Supply given by: (J = 100p 500 1. Draw both Supply and Demand for this market. Label the xintercepts and yintercepts for both Supply and Demand. What is the free-market p* and 0* in this example? Show your work. Suppose that this government has a Quota of 500 units in this market however. In this case: 2. What is the Consumer Surplus and Producer Surplus with this quota in place? How much Deadweight Loss does this Quota produce? Show your work Show your work. Suppose that the local mayor is concerned that they are producing Deadweight Loss in this case and are not even raising any revenue. The mayor therefore proposes instituting a tax instead of this quota that will still result in a Q of 500 units, but, as the mayor says, it would also increase Total Surplus because of the revenue it raises. 3. If the Mayor wants to reduce the quantity sold in this market to be equal to 500 units, then what size tax does the mayor need to put into place? Show your work. 4. What is the Buyer's and Seller's incidence of this tax? Show your work. 5. What is the Consumer Surplus, Producer Surplus, and Revenue Raised in this case? Finally, would the mayor be successful in increasing Total Surplus relative to the Quota case? Why or why not? Show your work
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