[30 marks] Pieland County has a perfectly competitive market for apples. Each day, the demand and supply for kilograms of apples are given by:…

1. [30 marks] Pieland County has a perfectly competitive market for apples. Each day, the

demand and supply for kilograms of apples are given by:

Demand: p=18-(Q/2)

Supply: p=Q/4

(a) [8 marks] Calculate the equilibrium (p* and Q*) and draw an accurate diagram of the

apple market. Calculate CS and PS at the equilibrium.

(b) [12 marks] Suppose the government of Pieland brings in a tax of $1.50 per kilogram

of apples, and makes sellers collect this tax. Find:

– The consumer’s price (pc) and producer’s price (pp) after the tax

– The new CS and PS

– The DWL created by the tax

– The revenue raised by the tax

– The amount of this revenue which is paid by buyers and sellers, respectively.

Draw a diagram of the market after-tax and show all of the above on your diagram.

(c) [4 marks] Show that your answers would be the same if buyers collected the tax

instead of sellers. (You don’t have to repeat everything: just find QT, pc and pp in this

case).

(d) [6 marks] Use the demand curve to find the elasticity of demand between p* and pc

(using the midpoint method). Use the supply curve to find the elasticity of supply

between p* and pp (using the midpoint method). Use your answers to argue that

“the less elastic side of the market bears more of the burden of the tax.”

 
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