Name: Renee Wong

Student ID: 101223251

Tutorial Group: Group 5 (Thursday @ 9:00 a.m.)

Multiple-choice questions
1. D
2. A
3. B
4. B
5. D
6. B
7. A
8. C
9. D
10. B
11. C
12. A
13. D
14. D
15. A
16. A

Review questions
Question 1

a) When the identical dollar tax is imposed in both markets, it will cause the supply curve to
decrease. This is because the tax is considered as an extra cost and hence when the cost
increases, the supply curve will shift to the left from S1 to S2. The tax imposed increases
the price paid by the consumers from P1 to P2 while the price received by the producers
 after paying the tax is P3. The consumer burden for both markets is represented by the
blue shaded rectangle while the producer burden for both markets is represented by the
red shaded rectangle. Consumer burden for good Y is more than that of good X while the
producer burden for good Y is less than that of good X. This is because the demand curve
for good Y is steeper than that of good X. Hence, when the demand curve is steeper, the
consumer has to bear a higher burden of tax than that of the producer and vice versa.

b) If the goal of the government is to raise revenue with minimum impact to quantity
consumed, the tax should be imposed in the market for good Y. This is because the
demand curve for good Y is steeper which means the consumer for this market do not
change how much they buy when the price changes. Hence, when the price increases due
to the tax imposition, the quantity demanded only decreases by a smaller proportion.

c) If the goal of the government is to discourage the consumption, the tax should be imposed
in the market for good X. This is because the demand curve for good X is less steep
which means the consumer for this market can make their own choice on buying the
goods when the price changes. Hence, when the price increases due to the tax imposition,
the quantity demanded will decrease by a bigger proportion.
Question 2
Consumer surplus
Consumer surplus is determined by the area below the demand curve and above the market
price. The initial equilibrium price is $7 and the equilibrium quantity is 12,000 bushels.
Hence, the original consumer surplus is the area A+B. When the market price is imposed at
$5, the quantity demanded has decreased to 8,000 bushels. Hence, the new consumer surplus
is the area A+C.
Producer surplus
The producer surplus is determined by the area above the supply curve and below the market
price. At the equilibrium price of $7, the area representing the producer burden is C+D+E.
When the market price is imposed at $5, the area representing the producer surplus is E.
Deadweight loss
At the equilibrium price of $7, there is no deadweight loss. When the market price of $5 is
imposed, it caused a deadweight loss of area B+D.

Question 3
a) In the corn market, there will be a surplus of 10,000 bushels as a result of the price floor.
b) If the government agrees to purchase any surplus output at $12, it will cost the
government by $120,000.
c) If the government buys all of the farmers' output at the floor price, the government has to
purchase 28,000 bushels and it will cost a total of $336,000 ($12*28,000 = $336,000).
d) The government will be able to sell off all of the output it had purchased from the farmers
at the price of $6 per bushel. The revenue received from the government’s sale is
$168,000.
e) The taxpayers will prefer scheme 1.
f) The farmers are indifferent between scheme 1 and scheme 2 because they still can sell all
of their outputs in the end.
g) The corn buyers will prefer scheme 2 as they can buy the corn at a cheaper price.