The market for 4WD cars has been described by the following supply and demand functions:
Supply: P = 15 + 2Q
Demand: P = 100 – 3Q
where P is the price per car in thousands of dollars and Q is the quantity of 4WD cars per month .
a) Find the equilibrium prices and quantities. Construct a graph of supply and demand for this market, showing all intercepts, and showing the equilibrium prices and quantities you have calculated.
b) At the market equilibrium price, what would be the total monthly revenue?
c) Calculate consumer surplus at the market equilibrium and indicate this surplus as an area on your diagram. Interpret the meaning of this value.
d) Calculate producer surplus at the market equilibrium and indicate this surplus as an area on your diagram. Interpret the meaning of this value.
e) A per-unit tax of $4,000.00 per car is imposed by the government on the firms that sell 4WD cars. Depict this on your demand and supply diagram. (Hint: the new tax inclusive supply function will be: P = 19 + 2Q). What is the new market equilibrium quantity? What price will consumers now pay and what price will suppliers now receive?
f) How much is the government revenue from the tax on suppliers?
g) Calculate consumer surplus and producer surplus after the imposition of the tax and any deadweight loss associated with the tax. Indicate these surplus and tax revenue areas on your diagram. Explain what the deadweight loss represents.
h) Now examine the case where instead of imposing a per-unit tax of $4,000.00 per car on suppliers the government decides to apply the same per-unit tax on 4WD buyers. Depict this on your demand and supply diagram. (Hint: the new tax inclusive demand function will be: P = 96 – 3Q). What is the new market equilibrium quantity? What price will consumers now pay and what price will suppliers now receive?
i) How much is the government revenue from the tax on consumers?
j) Who bears the greatest burden of the tax in each of the two taxation cases, producers or consumers?