Question: Suppose you are an aid to a government official deciding on some recently proposed excise tax on the welfare of her constituents. One way of measuring the impact on her constituents is to determine how that tax change affects the level of consumer surplus enjoyed by her citizens in her area. By using a formal analysis and estimates of demand and supply:
Q (demand) = 500 - 5P and Q (supply) = 2P- 60
1. Graph the supply and demand curves
2. What are the equilibrium quantity and equilibrium price?
3. How much consumer surplus exists in this market?
4. IF a $2 excise tax is levied on this good, what will happen to the equilibrium price and quantity?
5. What will the consumer surplus be after the tax?