Task 1 (Approx. 20 minutes) Consider the following:

The government wants to introduce a new tax of $1 on suppliers to raise revenue on two types of take away beverages, coffee and tea: Assume:

Drinkers (suppliers) of coffee do not drink (supply) tea and drinkers (suppliers) of tea do not drink (supply) coffee.

the supply functions for coffee and tea are virtually the same.

The demand for tea is elastic.

The demand for coffee is inelastic.

a) Consider the effect of the tax on both the market for both beverages using two independent graphs

b) In which market would the tax burden be greater on consumers and why?

c) In which market would there be a greater deadweight loss and why?

d) If the goal of the government was to generate a fixed amount of revenue while minimising deadweight loss, what should it do? Would it be fair?

Task 2 (Approx. 25 minutes)

A market is characterized by the following supply and demand curves:

Qs = 2P

Qd = 300 - P

a) Solve for the equilibrium price and quantity

b) If the government imposes a price ceiling of $90, does a shortage or surplus (or neither) develop? What are the price, quantity supplied, quantity demanded and size of the shortage or surplus?

c) If the government imposes a price floor of $90, does a shortage or surplus (or neither) develop? What are the price, quantity supplied, quantity demanded and size of the shortage or surplus

Task 3 (Approx. 15 minutes)

Suppose that the government pays a subsidy to apartment builders for each apartment that is sold.

a) Illustrate the effect of this subsidy on the market being sure to label consumer, producer surplus, cost to government and deadweight loss.

b) How does the size of the elasticities of demand and supply affect the size of the deadweight loss? Illustrate your answer with diagrams.