Suppose the demand and supply curves for basketballs are given by: Qd = 200 – 5P
Qs = -20 + 6P.
a) Using the demand and supply functions above, the equilibrium price of a basketball is ____, and the equilibrium quantity is ____. Illustrate your answer.
b) Compute price elasticity of demand and supply at the equilibrium price and quantity. Price elasticity of demand is equal to___ _ and price elasticity supply is equal to ____.
c) On the same graph above, show the effect on equilibrium price and quantity of a) an increase in the price of rubber used to make basketballs, and b) changing preferences of kids to playing more soccer.
d) From the demand and supply curves given above, compute CS, PS, and aggregate surplus. Illustrate on Graph.
e) Government wants to increase its revenues. Legislators decide that they will impose an excise tax of $3 per basketball on producers of basketball. Using the demand and supply curves above, the new equilibrium price and quantity of Basketballs would be _____, ______. The producers will receive a net of tax price of ____. The government will collect total tax revenue of ______. Illustrate your answer.
F) Define, in words, deadweight loss, and briefly explain why the excise tax causes a dead weight loss. Compute deadweight loss (DWL). Illustrate DWL in the graph above.