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Use the following information to answer this question. Suppose there is a market for bicycles in Wheelerville that can be described by the following demand and supply equations:
Demand: Q = 200 – (1/5)P
Supply: Q = (1/5)P – 40
Where Q refers to the quantity of bicycles and P is the price of a bicycle.
What is the equilibrium price and equilibrium quantity of bicycles in Wheelerville? Calculate the value of consumer surplus, producer surplus, and total surplus in this market.
Suppose an excise tax of $50 per bicycle is imposed on bicycle producers in this market? What is the new equilibrium price and equilibrium quantity of bicycles in this market with the imposition of the excise tax? What is the net price received by bike producers when this excise tax is implemented? What is the economic burden of the excise tax on consumers (consumer tax incidence)? What is the economic burden of the excise tax on producers (producer tax incidence)?
Given the excise tax described in part (b), calculate the value of the excise tax revenue. What is the value of producer surplus with the excise tax? What is the value of consumer surplus with the excise tax? What is the deadweight loss due to the imposition of the excise tax?
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