Principles of Microeconomics Discussion
Question 1 (5 points)
a). Evaluate the following statement. Do you agree? Why or why not?
“A tax that has no deadweight loss cannot raise any revenue for the government.”
b). A tax is imposed on a certain good. The tax produces revenue of $5,000 for the government. The tax reduces consumer surplus by $3,000 and it reduces producer surplus by $4,000. What is the amount of the deadweight loss of the tax?
Question 2 (10 points)
a). What are the equilibrium price and equilibrium quantity in this market?
b). How much is consumer surplus at the market equilibrium?
(Hint: the area of a triangle is ½ ×base × height.)
c). How much is producer surplus at the market equilibrium?
d). How much is total surplus at the market equilibrium?
e). Suppose the government places a $4 tax per unit on this good. What price will consumers pay for the good after the tax is imposed? What price will sellers receive for the good after the tax is imposed?
f). How many units of this good will be bought and sold after the tax is imposed?
g). How much is consumer surplus after the tax is imposed?
h). How much is producer surplus after the tax is imposed?
i). How much tax revenue is collected after the tax is imposed?
j). How much is the deadweight loss from the tax?
Question 3 (5 points)
a) Suppose the market-equilibrium quantity of good x is larger than the socially-optimal quantity of good x. Does the production of good x convey a positive externality or does it convey a negative externality?
b) What are the three externalities that are associated with driving cars and trucks?