Consider a market where demand is D: P = 26 - 0.5Q and supply is S: P = 1 + 2Q.
a. Find market equilibrium, consumer surplus CS, producer surplus PS and total surplus TS.
b. Impose a specific tax T = $5 on each unit sold. Find quantity Q' and price P' consumers will pay after tax is imposed. Find tax revenue TR of the government. Find consumer surplus CS', producer surplus PS' and total surplus TS' after tax was imposed.
c. Construct a budget neutral subsidy in a market where demand is D: P = 16 - Q and supply is S: P = Q. Find welfare effects (changes in CS, PS, TS) resulting from the subsidy. Do not forget to account for the subsidy expenditure SE.