Question
The market demand and supply functions for an item are as follows: qd = 24 p qs = 2p. (a) Calculate the equilibrium price and
The market demand and supply functions for an item are as follows: qd = 24 p qs = 2p. (a) Calculate the equilibrium price and quantity. (b) Suppose the government imposes a per unit tax of Rs 1.50 on sellers. How is the economic burden of the tax distributed across buyers and sellers? Also calculate the deadweight loss of the tax. (c) Consider a general tax rate t per unit, to be paid by the sellers. Find the value of t that maximizes tax revenue for the government. (d) If the government chooses t to maximize the sum of consumers' surplus, producers' surplus and tax revenue, what would be the optimum choice? (e) Suppose a producers' lobby can influence the government to set a price floor p that maximizes producers' surplus rather than social surplus. What price floor will the lobby recommend? Calculate the deadweight loss, assuming sellers only produce an amount equal to the quantity demanded at the controlled price
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