Compute value of deadweight loss with new demand curve

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Reference no: EM1347297

1. Consider a perfectly competitive market for a good with the following supply and demand curves:
QD = 400 - P
QS = 80 + 4P

a) Calculate the change in equilibrium quantity, and the size of the deadweight loss that will result if a unit tax of $10 is imposed on consumers of this good. Draw a graph that illustrates how you arrived at your answer.

b) Suppose the demand curve changes to:
QD' = 376 - 0.6P

First, verify that the pre-tax equilibrium is approximately the same with this new demand curve. By how much does quantity change when a $10 tax is imposed on consumers? Based on this answer, what should happen to the deadweight loss (relative to part a)? Compute the value of deadweight loss with the new demand curve to verify your intuition about the answer to the previous question.

Reference no: EM1347297

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