Consider the following demand and supply schedules for linen shirts. QD =70,000−2,000P
QS =10,000+2,000P , P≥$5
- (a) Determine the equilibrium price (P1) and quantity (Q1) for shirts based on the demand and supply schedules given above. Clearly explain why we refer to this point as the equilibrium, and illustrate your answer using a well-labeled graph. (7.5 points)
- (b) Calculate the Consumer Surplus (CS1), Producer Surplus (PS1), and Total Value. Illustrate your answer using a well labeled graph. (7.5 points)
- (c) Suppose the government imposes a tax of $3/shirt on the producers. Calculate the price of shirts for consumers (P2) and quantity (Q2) with the tax? Calculate the Consumer Surplus with tax (CS2), the Producer Surplus with tax (PS2), and the Government Revenues (GR2). Illustrate your answer using a well labeled graph. (10 points)
- (d) Calculate the dead-weight loss from imposing the tax. Clearly show all calculations, and illustrate your answer using the graph in part (b). (5 points)
- (e) Calculate the elasticity of demand (εQD,P) between the price determined in part (a) and the price determined in part (b). Provide an interpretation for the calculated price elasticity of demand. Clearly show all calculations. Is demand elastic, unit- elastic, or inelastic? (5 points)
