Problem 1:

Suppose we know the following market demand and supply curves for some commodity Q:

(Demand): QD = 10,000 - 10P,

(Supply): QS = - 500 + 2P.

(a) Find the equilibrium price and quantity, and graph your solution

(b) What are the own-price demand and supply elasticities when evaluated at the equilibrium point? Using these elasticity values, what is the predicted consumer and producer burden of a possible per unit tax? The government has decided tax Q with a tax equal to 7.25% of the price.

(c) Under the tax scheme, what is the price to consumers and producers, the new Q traded in the market, and the revenue/cost to the government.

(d) What is the consumers' burden and producers' burden as measured by how many dollars each contributes to tax revenues relative to total tax revenues? Show your calculations.

(f) What are the (i) change in consumers' surplus, (ii) the change in producers' surplus, and (iii) the deadweight loss from this policy? Explain what the deadweight loss here represents.