Keshav Raghuvanshi 51-108206

P1 P2

Increase in CS

d 2 ( p2 )

1.
P1B E1B

Increase in CS
P2B E2B

P2=P 2(Q2)

P1A

E1A

P2A

E2A

d1(P)1

O1

Q1B

Q1A

Q1

O2

Q2A

Q2B

Q2

Decrease in PS
P1

Increase in PS

P2

Decrease in PS
P2=P 2(Q2)

P1B

E1B

ASC1(Q1) P2B

E2B

ASC2(Q2)

P1A ASC1A ASC1B O1 Q1B Q1A

E1A

P2A ASC2B ASC2A

E2A

d1(P)1

Q1

O2

Q2A

Q2B

Q2

Decrease in PS

Increase in PS

P1

Increase in CS

P2

Decrease in PS
P2=P 2(Q2) P1B E1B ASC1(Q1) P2B P1A ASC1A d1(P)1 ASC1B O1 Q1B Q1A E1A P2A ASC2B ASC2A Q1 O2 Q2A Q2B Q2 E2B ASC2(Q2)

E2A

Decrease in PS

Increase in PS

Increase in PS

2. (1)

1050

Decrease in CS Increase in Tax Decrease in PS

500 300 d(P) 100 O 85 96 100 SMC Q

Decrease in SB

Slope of Demand =

100  85 15 (Q ! ! 0.02 = 300  1050 750 (P

Change in demand after raising Tax = 200 (-0.02) = -4 Demand after tax = 100 -4 = 96 SB =

1 B P  P A Q A  Q B = 1 300  500 96  100 = -1600 2 2 1 B P  P A Q A  Q B = 1 300  500 96  100 ! 19600 2 2

CS =

PS = (300-100)(96-100) = 200(-4) = -800 Tax Revenue = (500-300)96 = 19200 SS = CS + PS + = -19600 800 = - 20400 SS = CS + PS + Tax Revenue - External Cost = 19600 800 + 19200 - 0 = 1200

(2)

P1

P2

D2(P2, P1B)

D2(P2, P1A)

P1A = 500 P1B = 300 d(P1, P2) O Primary Market Q1A=96 Q1B =100 Q1

P2B =P2A =100

SMC

200 Secondary Market

300-500

Q2

Raising the price of liquor in Primary Market increases the demand of alcohol-free beverage in Secondary Market. However consumer surplus of secondary market does not change because those who move from primary market to secondary market they are indifferent. So, CS = 0 SB =

1 B P  P A Q A  Q B = 1 100  100 300  200 = 10000 2 2

External Cost = (100300-100200) 0 = 10000

SC = Private variable cost +

SS = SB - SC = 10000 10000 = 0

(3)

P1

P2

D2(P2, P1B) 350 P1A = 500 P1B = 300 d(P1, P2) O Primary Market Q1A=96 Q1B =100 Q1 O P2B =P2 =300
A

D2(P2, P1A)

SMC

100 Secondary Market

200-300

Q2

SB =

1 B P  P A Q A  Q B = 1 300  300 200  100 = 30000 2 2

External Cost = (300200-300100) + (350-300)(200-100) = 30000+5000=35000

SC = Private variable cost +

SS = SB - SC = 30000 35000 = -5000