What is the before tax consumer and producer surplus

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Reference no: EM13834192

Suppose the current equilibrium price of a quarter-pound hamburger is $5 and 10 million quarter-pound hamburgers are sold per month. After the federal government imposes a tax of $.50 per hamburger, the equilibrium price of hamburgers rises to $5.20 and the equilibrium quantity falls to 9 million. Illustrate this situation with a demand and supply graph. Be sure your graph shows the equilibrium price before and after the tax and the equilibrium quantity before and after the tax. Label the areas on your graph in order to answer the following questions.

a. What is the before tax consumer and producer surplus?

b. What is the after tax consumer surplus and producer surplus?

c. Calculate the dollar amount of tax revenue and the dollar amount of the deadweight loss.

d. Based on the information in the question, explain which side of the market (demand or supply) is more elastic.

e. Explain what is meant by the benefits received principle of taxation and the ability to pay principle of taxation.

f. Suppose the government uses the revenue from this tax to pay for nutrition education programs in public schools. Explain whether this tax reflects either the benefits received principle or the ability to pay principle.

Reference no: EM13834192

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