Question Four

The people of Vudee consume many blankets according to the demand curve: P = 190 –
(1/4)Qd. Blankets are supplied by Urafiki Company, according to the supply curve : P = 10 +
Qs.
a)What are consumer surplus (CS) and producer surplus (PS)?

Soln
Given; P=190 –(1/4)Qd(Demand function)
P = 10 + Qs. (Supply function)
Required to find consumer surplus and producer surplus;

Equate Qs=Qd

190 –1/4Q=10+Q

190–10=Q+1/4Q

180=1,25Q

Divide by 1.25 both sides

Q=144

P=10+144

P=154

Equilibrium price is TZS154 and Equilibrium quantity is 144units

Consumer surplus

Let a=144,b=0

From; ᶘ((demand function) –Equilibrium price)Qd/a,b

; ᶘ((190 –0.25Q) –154)Qd/144,0

; ᶘ(36 –0.25Q)Qd/144,0
 ; (36Q –0.25Q^2/2)/144,0

(36×144 –(0.25×144^2)

(5184 –2592)=2592

Consumer surplus is 2592

Producer surplus

From; ᶘ((Equilibrium price) – supply function)Qd/a,b

; ᶘ(154–10+Q)Qd/144,0

; ᶘ(144 +Q)Qd/144,0

; (144Q –Q^2/2)/144,0

(144×144–(144^2/2)

20736–10368=10368

Producer surplus is 10368

b) Now, suppose that the government of Vudee to impose an excise tax of TZS30 per blanket.
Graph the market for blankets in Vudee with the excise tax and solve for the new equilibrium
price and quantity, PeT and QT

Soln

Given; P=190 –(1/4)Qd(Demand function)

P = 10 + Qs. (Supply function)
Excise tax imposed is TZS30;

Therefore,P –30=10+Qs

P=40+Qs

Equate Qs=Qd

190 –1/4Q=40+Q

190–40=Q+1/4Q
150=1,25Q

Divide by 1.25 both sides

Q=120

P=40+120

P=160

Y-intercept;P=190–(0.25×0)

P=190–0

P=190

Y-intercept;P=10+120

P=130

GRAPH FOR THE MARKET WITH TAX

P
190

160

130

120
c)What is the price that buyers pay with the tax? What is the price that sellers receive with the tax?
Ans;The price that a buyer will pay with the tax is equal to the equilibrium price after tax which is equal to T
that sellers receive with tax is equal to the equilibrium after tax which is also TZS 160.

d)Draw a new graph of the market with the excise tax. On that graph, label each of the following and calcula
values.
(i) Consumer surplus and Producer surplus with the tax
(ii) Calculate the government revenue from the tax.
(iii) Deadweight loss from the tax (DWL)
(iv)Total consumer and total producer tax incidence

Ans;

GRAPH FOR THE MARKET WITH TAX

190

154

130

Producer surplus
 120 144

** Expression is faulty **)Consumer surplus =Area of the triangle

From the graph; b=120.h=(190–160)=30
A=1/2×120×30
A=1800
Therefore consumer surplus is 1800

Producer surplus=Area of the triangle

From the graph; b=120,b=(160–40)
A=1/2×120×120
A=7200
Therefore producer surplus is 7200

** Expression is faulty **)Government tax=(tax×Quantity )

=30×120
=3600