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Let demand for notebook paper be given by Q = 50 - 5P, while supply is given by Q = 5P.
a) Calculate consumer surplus (CS), producer surplus (PS), and welfare generated by this market.
b) If demand were instead Q = 75 - 10P, so that initial equilibrium price P and quantity Q were unchanged from part a), would the loss of CS be higher or lower if the price increases? Use a graph to support your argument. (Hint: you shouldn't need to do calculations to answer this question.)
c) Suppose that there are no fixed costs in the notebook paper industry. Derive industry profit.
d) A tax of $0.20 (20 cents) per notebook paper packet is implemented. Using demand from part a), calculate CS, PS, tax revenue (TR), and total welfare. Explain intuitively any change in welfare. (Assume fractional quantities are possible in your analysis.)
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