Assume you are an aide to a U.S. senator who is concerned about the impact of a recently proposed excise tax on the welfare of her constituents. You explained to the senator that one way of measuring the impact on her constituents is to estimate how the tax change affects the level of consumer surplus enjoyed by the constituents. You are given the go-ahead to conduct a formal analysis based on your arguments, and obtain the following estimates of supply and demand: Qs = 2p - 60 and Qd =500 - 5p
1. Graph the demand and supply curves.
2. What are the equilibrium price and equilibrium quantity?
3. Discuss how much consumer surplus exists in this market?
4. What will happen to the equilibrium price and quantity if a $2 excise tax is levied on this good?
5. Explain what will the consumer surplus be after the tax?