True/False Questions (TOTAL: 5 marks)

a. Welfare economics deals with how well being affects resource in society.

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b. Total surplus is a measure of equality among the members of society.

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c. Producer surplus tends to be large when demand is price inelastic.

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d. When the sale of a good is taxed, consumer surplus declines and producer surplus increases.

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e. Deadweight loss is greatest when both supply and demand are relatively elastic.

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Short answer questions (Use the space provided)

a. Identify and briefly describe the four canons of taxation (4 marks)?

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b. What happens to consumer and producer surplus when the sale of a good is taxed (3 marks)? How does the change in consumer and producer surplus compare to the tax revenue (2 marks)? Briefly explain (1 mark).

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Computation/Calculation questions (Use the space provided)

3A. Suppose that a market is described by the following supply and demand equations:

Q_S=2P

Q_D=300-P

Solve for the equilibrium price and quantity. [4 marks]

ANSWER:

Suppose that a tax t is placed on buyers, so the new demand equation is:

Q_D=300-(P+t)

Solve for the new equilibrium. What happens to the price received by sellers, the price received by buyers and the quantity sold? [5 marks]

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3B. Suppose that the demand Q^Dand supply Q^Sfor maize meal in Kimberley is given by

p=120-0.7Q^Dand p=3+0.2Q^S

where the quantity is in thousands of kilograms and the price (p) is in rands per kilogram. Answer the following:

Find the market equilibrium quantity, and the equilibrium price of maize meal. (2 marks)

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Find the consumer and producer surplus at the market equilibrium that you found in part (a). (4 marks)

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