Problem Chapter 6: Impact of Taxation

1. The demand curve for a cigarette is QD = 72 - 2P while the supply curve is QS

= 12 + 4P, where P is measured by VND thousand per box, and Q by a hundred
thousand boxes. The government decided to levy a consumption tax of VND 6,000
per box.
a. What is pre- and after-tax gross revenue?
b. What is the tax burden paid by consumers and producers?
c. What is tax-induced deadweight loss from consumers’ and producers’
sides?
d. What is the total tax revenue and total deadweight loss of the society?
2. The demand curve for school bags in a small locality is QD = 600 – 2P while
the supply curve is QS = 300 + 4P, where P is measured by VND thousand per
school bag, and Q by thousands of pieces. The government decided to levy a
consumption tax of VND 6,000 per school bag. Please indicate:
a. What is market equilibrium, producer surplus, and consumer surplus before
taxes?
b. What is total tax revenue, tax burden paid by producers and consumers, and
change in producer surplus and consumer surplus after taxes?
c. What is the total deadweight loss of the society by consumption tax?
deadweight loss from consumers’ and producers’ sides?
3. With the market for school bags as stated in Exercise 2 instead of levying a
consumption tax, the government wants to encourage the learning production
firms, so it decides to subsidize a production subsidy of VND 3,000 per school
bag. Please indicate:
a. What is market equilibrium, producer surplus, and consumer surplus before
subsidies?
b. The total amount of subsidy that the government budget has to spend, the
benefits of the subsidy by producers and consumers, and the change in
producer surplus and consumer surplus after the subsidy.
c. What is the total deadweight loss of the society by production subsidy?
deadweight loss from consumers’ and producers’ sides?

1|Page Note: Open Book