Question
Suppose you are an aide to a U.S. senator who is concerned about the impact of a recently proposed sales tax on the welfare of
Suppose you are an aide to a U.S. senator who is concerned about the impact of a recently proposed sales tax on the welfare of her constituents. You explained to the senator that one way of measuring the impact on her constituents is to determine how the tax change affects the level of consumer surplus enjoyed by the constituents. Based on your arguments, you are given the go-ahead to conduct a formal analysis, and you obtain the following estimates of demand and supply: QD= 500 - 5P and QS= 2P 60.
(a) Rewrite both equations in the form P = f(Q), P as the left had side variable and Q as the right
hand side variable.
(b) What are the equilibrium quantity and equilibrium price?
(c) How much consumer surplus exists in this market? Please show your calculations.
(d) If a $2 sales tax is levied on this good, what will happen to the equilibrium price and
quantity? The demand curve is unchanged, and the new supply curve is QS= 2P - 64.
(e) What will the consumer surplus be after the tax?Please show your calculations.
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