Individual Assignment 2 Tax & government interventions

Rizqi Ghani Faturrahman

29120382
YP64-B
Business Economics
1. “Government’s goal to change people’s behavior by increasing tax on cigarettes may only
lead to a small decrease in cigarette’s consumption.” Explain, using economic theory why
this may be the case.
Answer:
Increasing taxes on cigarettes will reduce cigarette use in some countries with low level of cigarette
consumption. Therefore, it will have a negative impact on the tobacco industry and tobacco
producer. It is important to estimate these negative effects so that the government policy makers can
better understand the situation when making decisions about cigarette taxes. However, if we look at
several countries with a high level of cigarette consumption such as Indonesia the cigarette can be
categorized as inelastic goods so the increase in taxes and price will not have much effect on
changing people’s behavior in cigarette consumption.

2. The following table shows the market demand and supply schedules for cups of coffee at the
Campus Coffee Shop. Graph the demand and supply curve and find the equilibrium price and
equilibrium output.

a) At equilibrium price, graphically show consumer surplus, producer surplus, total surplus.

Answer:

Consumer Surplus = 1/2* 2*2000 = 2000

Producer Surplus = 1/2*1*1000 = 1000

Total Surplus = 1/2*3*2000 = 3000

Graphic:

b) If government imposed a quota on the Campus Coffee Shop such that they could not sell
more than 1,000 cups of coffee, what will be the new price and output at the shop? How
will the quota affect consumer, producer, and total surplus?

Answer:

Consumer Surplus = (1/2*1*1000) + (1*1000) = 1500

Producer Surplus = (1/2*0.5*1000) + (0.5*1000) = 750

Deadweight Loss = 1/2*1.5*1000 = 750

Total Surplus = 1500 + 750 = 2250

Graphic:
c) If the government imposed a $ 0.50 price ceiling in the market for coffee, what will be the
new price and output at the Campus Coffee Shop? How will the price ceiling affect
consumer, producer, and total surplus?

Answer:

Consumer Surplus = (1/2*0.5*1000) + (1.5*1000) = 1750

Producer = (1/2*0.5*1000) = 250

Deadweight Loss = 1/2*1.5*1000 = 750

Total Surplus = 1750 + 250 = 2250

Graphic:

d) If the government imposed a $ 2 price floor in the market for coffee, what will be the new
price and output at the Campus Coffee Shop? How will the price floor affect consumer,
producer, and total surplus?

Answer:

Consumer Surplus = 1/2*1*1000 = 500

Producer Surplus = (1/2*0.5*1000) + (1.5*1000) = 1750

Deadweight Loss = 1/2*1.5*1000 = 750

Total Surplus = 1750 + 500 = 2250

Graphic:
e) If the government imposed a $ 0.50 tax/unit levied on the supplier in the market for coffee,
what will be the new price and output at the Campus Coffee Shop? How will tax levied on
the supplier affect consumer, producer, and total surplus?

Answer:

➢ Supply Function:

Ps = a(Q)-b

(X1,Y1) (X2,Y2) = (2000,1) (3000,1.50)

m = (1.50-1)/(3000-2000) = 0.0005

Ps = 0.0005Q – b

1 = 0.0005(2000) – b

1=1–b

b=0

Ps = 0.0005Q

➢ Demand Function:
Pd = -aQ + b
(X1,Y1) (X2,Y2) = (1000,2) (2000,1)
m = (1-2)/(2000-1000) = -0.0001
Pd = -0.001Q + b
2 = -0.001(1000) + b
1 = -1 + b
3=b
➢ Beginning Equilibrium
Ps = Pd
0.0005Q = -0.001Q + 3
0.0015Q = 3
Q = 2000
P=1
 ➢ Equilibrium After Tax
Pd = Pstx
-0.0001Q + 3 = 0.0005Q + 0.50
-0.0015Q = -2.5
Qtx = 1666.7
Pstx = 0.0005 (1666.7) + 0.50
Pstx = 0.83335 + 0.50
Ptx = 1.333
(Q,P) = (1666.7,1.333) Equilibrium After Tax

Consumer Surplus After Tax = (3-1.33) *1666.7/2 = 1389.194

Producer Surplus After Tax = (0.83335*1666.7)/2 = 694.47

Deadweight Loss = (1.33-0.833) * (2000-1666.7)/2 = 82.825

Total Surplus = 1389.194 + 694.47 = 2083,664

Graphic:
f) If the government imposed a $ 0.50 tax/unit levied on the buyer in the market for coffee,
what will be the new price and output at the Campus Coffee Shop? How will tax levied on
the buyer affect consumer, producer, and total surplus?

Answer:

Ps = 0.0005Q

Pd = -0.001Q + 3

Equilibrium After Tax:

Pdtx = Ps

-0.001Q + 2.5 = 0.0005Q

2.5 = 0.0015Q

1666.7 = Q

(Q,P) = (1666.7,0.833) Equilibrium After Tax

Consumer Surplus After Tax = (1666.7*7)/2 = 1416.695

Producer Surplus After Tax = (1666.7*0.83)/2 = 691.6805

Deadweight Loss = (1.33-0.833) *(2000-1666.7)/2 = 82.825

Total Surplus = 1416.695 + 691.6805

Graphic: