Elasticity of supply affect the loss of economic surplus

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1. How does elasticity of supply affect the loss of economic surplus caused by a price ceiling?

2. Why does the loss in total economic surplus directly experienced by participants in the market for a good that is taxed overstate the overall loss in economic surplus which results from the tax?

3. Suppose the weekly demand for a certain good, in thousands of units, is given by the equation P=8-Q, and the weekly supply of the good by the equation P=2+Q, where P is the price in dollars and Q is quantity.

a. Calculate the total weekly economic surplus generated at the market equilibrium.

b. Suppose a per-unit tax of $2, to be collected from sellers, is imposed in this market. Calculate the direct loss in economic surplus experienced by participants in this market as a result of the tax.

c. How much government revenue will this tax generate each week? If the revenue is used to offset other taxes paid by participants in this market, what will be their net reduction in total economic surplus?

4. Graph the supply and demand equations given in problem 3.

Reference no: EM13888370

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