Suupose the equation for the demand curve for some product X is P=8 - .6Q and the supply curve...?

Question

is P=2 + .4Q. What are the equilibrium price and the quantity? Now suppose an excise tax is imposed on X such that the new supply equation is P= 4 + ..4Q. How much tax revenue will this excise tax yield the government? Graph the curves and label the area of the graph that represents the tax collection "TC" and the area that represents the efficiency loss of the tax "EL". Briefly explain why area EL is the efficiency loss of the tax but TC is not. ( this is a q? from my micro econ class... I am completely lost)

Answer 1

1)

8-0.6Q=2+0.4Q

Q=8-2=6

P=4.4

2)

8-0.6Q=4+0.4Q

Q=8-4=4

P=5.6

Tax=$2 per unit of output

TaxRevenue= Q*T = 4*2=8

3)

Efficiency loss (dead-weight loss or loss of total surplus) for linear demand and supply is area of triangle:

EL = (Q1-Q2) * T/2 = (6-4) * 2/2 = 2

4)

EL means nobody will get this surplus - it is lost due to higher price (regulation/tax/etc.) but TC is part of total surplus transferred from producers and consumers to government.

Visual representation is here:

http://www.econmodel.com/classic/terms/s...